What Is Penetration Pricing Strategy: Meaning, Examples, and Benefits

Choosing the right pricing strategy can shape how well your business attracts customers, gains competitiveness, and develops in the future, especially if you’re a new market entrant.

One of the available pricing techniques that companies can rely on is penetration pricing – a strategy that includes introducing a new product or service at a very low initial price to build a customer base and gain market share. 

Below, we take a deep dive into penetration pricing. We explore what this strategy is and how it can help encourage customers to shop with you, turning you into a market leader.

What Is Penetration Pricing Strategy?

Penetration pricing, sometimes also referred to as predatory pricing, is a marketing strategy that involves launching a product or service at a low initial price. In most cases, market penetration pricing is used by companies launching a new product or new market entrants trying to stand out in highly competitive markets. 

The main objective of penetration pricing is to create a cheaper offering, beating all other prices in the established market. As a result, more customers will be attracted to the brand as it will create a sense of affordability like no other. 

How Penetration Pricing Works

A price penetration strategy works by prioritising market share over profits for a set period. The goal is to create demand, attract customers, and build brand loyalty.

When using this approach, companies set an initial price that undercuts competitors. This either pressures rivals to bring down their own prices or strategically implement other techniques to remain competitive.

Once the initial phase is completed and more customers have been attracted, the business gradually increases prices to boost profits and adapt to the increase in product value. 

What’s important to understand about this pricing method is that it works great for new market entrants or those offering innovative products. It’s also crucial to note that price elasticity is incredibly important, where companies offering price-elastic items can benefit greatly from this strategy. 

Characteristics of Penetration Pricing

There are three core characteristics of penetration pricing:

• Low initial price – Products are usually priced below market levels to attract attention and help build a customer base.
• Mass appeal – Companies adopting this strategy typically target a broad audience to maximise adoption quickly.
• Gradual price increases – Prices are raised once a loyal customer base is established.

These characteristics make penetration pricing highly effective for quickly building awareness. It encourages potential customers to sign up for subscription models and also appeals to price-sensitive customers in a competitive market.

Penetration Pricing vs Price Skimming

Penetration pricing is often compared to price skimming – another popular and frequently used approach for adjusting market prices when entering a new market.

However, these two techniques differ fundamentally.

While penetration pricing provides shoppers with a lower initial price, price skimming asks consumers to pay higher prices initially. After some time, the price gradually drops.

In most cases, price skimming is effective for innovative or luxury products where early adopters have low price sensitivity and are prepared to pay premium pricing. Companies that are part of niche markets can greatly benefit from this strategy as long as their offers are unique.

Price skimming generally concentrates on appealing to a small, exclusive target market, while penetration pricing aims to create quick appeal to a large portion of price-sensitive customers. 

Benefits of Penetration Pricing

Penetration pricing offers a vast range of benefits, which makes it only natural that so many companies explore this strategy at some point in their development.

Here are the most important penetration pricing pros worth knowing about. 

Quick Market Entry

One of the biggest advantages of penetration pricing is that it can help attract a large number of customers quickly by offering competitive prices. 

This can be a strategic way to gain a foothold in the market, which is essential for those competing in aggressive markets or commoditised industries. 

Increased Brand Recognition

When launching a new product or service at a price lower than most others, another perk you can enjoy is a positive brand image. 

Penetration pricing helps encourage product or service trials and contributes to establishing a presence in the market.  

Market Share Growth

Appealing to a mass market with a lower price point can also lead to market share growth and economies of scale. 

As many customers start purchasing your product or service, leading to a high sales quantity, you can achieve economies of scale and reduce your marginal costs. You can witness gradual drops in production, distribution, and marketing expenses. 

By undercutting competitors, penetration pricing enables businesses to dominate their niche.

Customer Loyalty 

Another powerful benefit of penetration pricing is that it can help you build a loyal customer base.

Early adopters often remain loyal, especially if they associate the brand with value. 

For example, one of the examples of how penetration pricing creates loyal customers is in the cell phone carrier space, where companies introduce affordable plans to lock in customers, sometimes for life. 

Cost Control

Last but not least, penetration pricing helps improve cost control. Implementing this strategy undoubtedly requires sophisticated budgeting and financial planning. 

Thanks to these practices, your business could identify hidden areas that can be enhanced to improve cost efficiency, reduce marginal costs, and optimise business expenses.

Risks and Challenges of Penetration Pricing

Although the penetration pricing model offers a variety of benefits, it’s also associated with a few potential risks and challenges.

Here are the possible disadvantages of penetration pricing that must be addressed. 

Low Profit Margins

Offering your products or services at a lower price initially may be good for attracting attention but it can also mean not being able to cover expenses. This is especially true for products with high fixed costs.

It’s key to monitor inventory levels carefully to reduce chances of oversupplying. In addition, it’s important to raise prices at the right time to prevent cutting away profit margins for too long.

Unsustainably Low Prices

Another possible drawback of penetration pricing is that it can sometimes create assumptions and customer expectations of cheap offerings.

This can not only make introducing a price increase much more difficult, but it could also generally create a sense of poor product or service quality, ultimately affecting the company’s overall brand reputation.

To avoid this, gradually raise prices and make sure to emphasise the quality or any unique benefits of your offering. 

Price Wars

Depending on the niche you’re competing in or the type of product you’re offering, you may also trigger price wars when using penetration pricing.

Rivals in the space are likely to respond to your market entry by lowering their own prices, discouraging consumers from trying your products or services. 

This can be detrimental for your profitability, especially if you’re a smaller business with much more financial vulnerabilities. 

Customer Backlash

Another challenge to consider is the risk of suffering customer backlash as your prices increase, potentially creating severe financial risks.

Entering a market with a very low price means that you’re predominantly appealing to price-sensitive customers, who may abandon the brand as prices gradually increase. 

One of the things you could do to prevent this is to communicate the value of your products and justify the price increase. 

When to Use Penetration Pricing

Penetration pricing can be used in multiple settings and scenarios when trying to attract a target market in a competitive landscape.

Some of the industries that are known to use this pricing approach include telecommunications, streaming services, and fast-moving consumer goods. We’ll look into these examples in more detail later on in this article.

The main scenarios when these industries rely on penetration pricing include:

• When entering competitive markets;
• When launching everyday products that are usually frequently purchased;
• When targeting price-sensitive customers.

These are just a few cases of when penetrating pricing is considered an effective approach. However, there may be other situations when this method will prove effective, depending on your industry, product or service, competitors, and other factors.

How to Implement Penetration Pricing

But what can you do to implement penetration pricing for your business?

Start by conducting extensive market research that will allow you to understand your customer’s price sensitivity. This phase will also equip you with vital details about your competitors’ pricing. 

Don’t forget to analyse the potential market size and demand for your product or service.

Next, calculate your expenses by determining both fixed and variable costs. This will enable you to set a sustainable pricing floor that will keep you profitable. 

You’re now ready to set a launch price. Choose one that’s low enough to attract customers but not below marginal costs. For example, a 20%-30% discount compared to competitors is a great starting point. 

Finally, monitor performance by tracking key metrics like sales volume, customer acquisition rate, and others. Gradually increase prices after establishing a loyal customer base and don’t forget to emphasise the quality of your products or services. 

Based on the data that you collect on performance, make adjustments where necessary.

Examples of Penetration Pricing in Action

In order to fully understand the nature of this pricing method, it’s vital to look at a few penetration pricing examples.

One area where penetration pricing is frequently used is among cable and internet service providers. Oftentimes, such businesses provide free streaming services or extra channels to attract the interest of new subscribers. Usually, this offer is active for a limited time and is great for building a user base. 

Another example of penetration pricing can be seen among cell phone carriers and smartphones. In these industries, companies tend to entice customers to sign long-term contracts with free solutions or affordable products. 

A similar strategy is visible in food and beverage companies, where manufacturers launch new products or flavours at extremely low prices. This affordability encourages consumers to give them a try. 

We can also explore how Netflix successfully used penetration pricing to attract Blockbuster customers with affordability. 

Metrics to Measure Penetration Pricing Success

To ensure that your penetration pricing techniques are working and performing well, it’s fundamental to rely on software solutions that help you monitor and analyse results.

Some of the key performance indicators (KPIs) that it’s key to monitor include:

• Customer acquisition rate – a metric that demonstrates how quickly new customers are signing up or purchasing products or services.
• Market share growth – a metric that measures the percentage of total market sales captured.
• Customer retention rate – a key performance indicator that shows how many customers remain after price adjustments. This metric is especially important as penetration pricing can attract short-term customers who are less likely to continue shopping with you when the price rises.
• Customer lifetime value – the value and contribution of customers to your profitability over time.
• Sales volume – evaluates total units sold during the penetration pricing period.
• Profit margins – assesses long-term profitability after initial price increases.

By having the key performance metrics in your arsenal, you can keep track of how penetration pricing is influencing your business. As a result, you’ll be able to make data-driven decisions that will boost your performance over time.

Conclusion

Overall, penetration pricing is a powerful strategy to attract customers, build brand recognition, and gain market share in competitive industries. 

However, in order to make the most of it, businesses must balance the initial low prices with a clear plan for future profitability and avoid some of the most frequent risks associated with this pricing approach.

We hope that this article will help you implement penetration pricing at the right time to achieve your business goals and outperform others. 

Frequently Asked Questions

Who needs to implement a penetration pricing strategy?

Some of the cases where companies can greatly benefit from a penetration pricing strategy are when launching a new product or service, entering a new market, or aiming for immediate and significant growth in market share.

When is the best time to increase prices after launching with a low initial price?

The best time to increase prices will depend on demand, market response, perceived value, and other factors. Some businesses keep low prices for a few months, while others gradually raise prices after securing a loyal customer base

When should you avoid penetration pricing?

Penetration pricing is not a good idea if profit margins are already too thin, if the product has high production costs, or if the target audience values quality over price.