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Penetration Pricing: Definition, Advantages & Disadvantages, Examples

Penetration Pricing: Definition, Advantages & Disadvantages, Examples

April 10, 2018


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.

Penetration Pricing

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.

How come others don’t do the same?

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.

Infographic: A Brief History of Netflix Price Hikes | Statista

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.


Frequently Asked Questions

What are penetration pricing advantages and disadvantages?

Advantages:
Boosts your sales volume.
If you keep prices low for a while, customers will unknowingly assume you are the cheapest destination.
Once you lure shoppers into your store, you can start working on building brand loyalty.
It not only disrupts the market but also scare away possible newcomers with insanely low prices.
Disadvantages:
Consumers overly attribute price to quality, so low prices can impair your brand image.
Increasing prices might alienate too many customers.
You might be entering a price war and you might not bear the palm.

What is a penetration pricing example?

Many B2C companies like Spotify, Netflix, etc. enter the market with penetration pricing. Once they attract a large customer base, they gradually increase prices.



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