Penetration Pricing

Penetration pricing is a strategy that lets company enter markets with a lower initial price to gain market share quickly. The main goal focuses on building a broad customer base along with competing against rivals through offering products at a more affordable price. After establishing brand loyalty or expanding customers, businesses raise their prices.

The formula shows how penetration pricing benefits companies in saturated markets because low costs attract buyers:

Initial Low Price + High Sales Volume = Market Penetration

Why Penetration Pricing is Important for Ecommerce

Penetration Pricing is a really effective method for ecommerce startups to establish themselves. The competitive nature of online retail makes pricing a deciding factor for consumers. This pricing method helps online sellers create brand recognition along with attracting many shoppers as well as keeping up with established merchants. When HelloFresh, a meal kit delivery service, entered the market, it used this method by offering significant discounts on the first few orders.

Factors Influencing Penetration Pricing

Market Share Growth

Companies can attract price-sensitive consumers and quickly build a large customer base by offering products at a lower price. Xiaomi used this approach in the mobile phone market by introducing devices that delivered premium features along with affordable prices, which attracted many buyers quickly.

Competitive Pressure

Companies face challenges to match reduced prices while keeping their profits. Companies that plan to recover initial deficits experience short term financial constraints. Several subscription box providers including Blue Apron, started with major first box discounts but faced difficulties maintaining earnings as they grew.

A lack of success often forces businesses to exit the market. Dollar Shave Club entered with razors priced way below Gillette or other established brands, which changed market dynamics. The temporary strain on profitability caused by initial low costs needs precise financial management.

Product Types Suitable for Penetration Pricing

Penetration pricing works well with everyday consumer goods like household items or electronics because customers react strongly to prices. Fast-moving industries regularly apply reduced introductory prices to attract early users and create momentum against competitors. The Google Home Mini launched at prices really below Amazon’s Echo Dot to secure market position.

Quality Perception

A low price point often reduces perceived product worth since buyers link it to inferior quality. High-end labels actively avoid this method to preserve their premium image.

Price Increases After Implementing Penetration Pricing

Any cost increase risks customer dissatisfaction and reduced purchases when consumers become accustomed to low prices. Uber first drew riders through rates below traditional cab fares but faced backlash after raising prices.

Customer Loyalty

Consumers who are accustomed to using a product at an affordable price, tend to become loyal to the brand, even when prices rise. Spotify initially offered lower-cost streaming subscriptions than buying individual songs or albums.

Applications in Business

Market Entry Strategy with Penetration Pricing

Startups often employ penetration pricing to impact the market and outshine competitors immediately. Startups may choose to increase rates later once they have a presence in the market.

Subscription Services

Many services that depend on subscriptions use penetration pricing to succeed. Disney+ chose to begin its streaming platform at prices well below Netflix or HBO Max to attract users quickly.

Retail Launches

Retailers might introduce new products at discounted prices. When Walmart first introduced its “Great Value” grocery line, the prices stayed lower than those of famous brands, which encouraged shoppers to try the products and helped build recognition.

Practical Examples

Several market leaders have utilized penetration pricing effectively. Netflix entered streaming with subscription costs below cable TV prices. The company attracted millions of customers quickly before raising rates gradually.

Peloton serves as another good case. During its market entry, the company sold exercise bikes along with memberships at reduced prices, which really appealed to consumers seeking budget-friendly fitness solutions.

Conclusion

Penetration pricing strategy works well for companies that want to enter competitive markets. Low prices attract buyers and build loyalty. Companies that set low prices in the first place can increase their market share and establish a presence before increasing prices for better profits. However, companies must note that early profits will reduce due to possible customer reactions when prices rise. Nonetheless, penetration pricing remains a valuable tool for helping businesses expand quickly in saturated markets.

Explore more about Pricing

Price

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Price Leader

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One of the hardest things for any e-commerce owner is making people aware of your new products or services. Since 17% of consumers value price over personalized experience, corporate values, or convenience, the best strategy to boost sales is to offer the best price. That’s why market penetration pricing strategy is a commonly used method of building hype around a product.

What is penetration pricing?

Penetration pricing is entering the market of a product with below-average prices. Any size or type of business use this tactic when they’re highlighting a new product or service or wish to enter a new market. It’s a great strategy to add to your marketing mix to grab a huge portion of the potential customer base early on or to capture customers from your rivals.

Pricing penetration use cases

Walmart, the American retail giant usually penetrates the market with a below-average price. However, unlike others, the company doesn’t increase prices over time and holds on to the ‘cheapest’ positioning in the market.

Walmart’s operations are bigger than most of its competitors’. The company has a significant cost advantage. It purchases products at a much lower cost-per-unit and sells them at a below-average price.

Some of you will recall Netflix when it charged $7.99 for the standard plan in 2010. The company gradually raised the monthly charge of the standard package to $12.99 in 2019.

Although we can’t accurately estimate the company’s profit, we know that it continuously invests in product development. In businesses like this, the product’s UX design and the quality of content are of equal importance to its price, perhaps more important.

That’s why Netflix raises the prices, even though it can draw away price-driven customers. The streaming company manages to maintain the majority of the customer base it has built with the help of its below-average price.

The two companies’ business models, objectives, and requirements are different. Both Walmart and Netflix successfully implement this strategy after modifying it a little.

Combining market penetration pricing with other strategies

The beauty of this strategy is that it works well with other pricing strategies. You can use penetration pricing to lure people into your store and then incentivize them to buy more with discounts on other products.

Furthermore, you can combine it with marketing strategies designed to build brand loyalty.

In many cases, getting that first sale is the hardest part of the game. Once you’ve mastered that, though, there is no reason why you can’t convert people further and convince them to buy more products.

Takeaways

If you do decide to implement this pricing strategy to your e-commerce store, think carefully about whether you can afford to lose profits temporarily and whether your niche would actually be receptive to penetration pricing.

And once you decide to take the plunge, ensure you have the right plan in place for how and when to increase your prices. If you get stuck, why not use a price comparison tool like Prisync to help you establish a fair price point.