Penetration Pricing
Penetration pricing is a strategy in which a company enters a market with a lower initial price to gain market share quickly. The primary objective is to attract a large customer base and outcompete rivals by offering products at a more affordable price. Businesses can raise prices after establishing brand loyalty and expanding their customer base.
As the formula below states, penetration pricing is especially beneficial when entering a saturated or highly competitive market because the low price draws attention.
Initial Low Price + High Sales Volume = Market Penetration
Why Penetration Pricing is Important for Ecommerce
In the fast-paced world of ecommerce, startups can effectively establish their presence in the market using penetration pricing. The competitive nature of online retail makes pricing a major deciding factor for consumers. When executed strategically, this pricing method helps online sellers generate brand awareness, attract a significant number of customers, and ultimately compete with more well-known, established players. 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
By offering products at a lower price, companies can attract price-sensitive consumers and quickly build a large customer base. Xiaomi used this tactic in the smartphone market, launching high-spec, low-priced phones that quickly captured attention.
Competitive Pressure
Impact on competitors who may struggle to match low prices without affecting their profitability. Businesses aiming to cover initial losses may experience profit squeezes in the short term. Many subscription box services, such as Blue Apron, initially offered heavy discounts on the first box. However, they struggled to maintain profitability as they scaled up.
This struggle could also push them out of the market. When Dollar Shave Club entered the razor industry, it offered razors at a much lower price than leading brands like Gillette, disrupting the market. The short-term pressure on profitability due to initial low pricing requires careful financial management.
Product Types that Work Well with Penetration Pricing
Penetration pricing works well with everyday consumer goods, such as household items or electronics, benefiting from this approach, as these markets are often competitive and driven by price sensitivity. For instance, Instacart initially offered lower delivery fees to attract more customers as a strategy for their grocery delivery services.
Fast-moving industries often use penetration pricing to capture early adopters and build momentum in fiercely competitive markets. Google priced its smart speaker, the Google Home Mini, significantly lower than competing products like Amazon’s Echo Dot to gain market share.
Perception of Quality
Low prices may decrease a brand’s perceived value, as they are associated with lower quality. Premium brands strategically avoid this method to preserve their premium image.
Price Increases After Implementing Penetration Pricing
Raising prices can lead to customer dissatisfaction and reduced sales once consumers become accustomed to low prices. Uber initially attracted riders with cheaper rates compared to traditional taxis but faced backlash when it increased its fares.
Customer Loyalty
Once consumers become accustomed to using a product at an affordable price, they may become loyal to the brand, even when prices rise. For instance, 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
Penetration pricing often applies to subscription-based businesses. Disney+ launched its streaming service at a much lower monthly price than competitors such as Netflix and HBO Max in order to quickly capture users.
Retail Launches
Retailers might introduce new products at discounted prices. When Walmart introduced its private label grocery brand “Great Value,” it priced it below well-known brands to gain attention and encourage trial.
Practical Examples
Many well-known companies have utilized penetration pricing. When Netflix first entered the streaming market, it offered subscription plans at lower prices than traditional cable services. This strategy helped the company gain widespread adoption quickly before increasing prices over time.
Let’s take Peloton as another example. When it launched, Peleton offered a significant discount on its home exercise bikes and subscriptions, attracting many first-time buyers looking for more affordable fitness equipment.
Conclusion
Penetration pricing proves highly effective for businesses aiming to enter a competitive market, capture a large customer base, and build brand loyalty quickly. By initially offering products at a low price, companies can increase sales volume and establish a strong foothold before gradually adjusting prices to improve profitability. However, companies must balance the risks of lower initial profits and carefully manage customer expectations as prices change over time. Penetration pricing can be a key tool for businesses seeking rapid growth in crowded markets.
