You’re launching a new product or service and considering different pricing strategies. You want something to get off to a flying start. You may have come across the term “penetration pricing strategy,” and many business owners have questions about how it works.
This approach involves setting your initial price lower than the competition to build market share and customer loyalty. But is a penetration pricing strategy the right choice for your brand?
Table Of Contents:
- Decoding the Penetration Pricing Strategy
- Navigating Customer Retention with Penetration Pricing Strategy
- Thinking Outside the Box: When Penetration Pricing Isn’t the Answer
- Conclusion
Decoding the Penetration Pricing Strategy
The core idea behind this strategy is simple. You offer a new product or service at a lower price than your competitors. This price penetration tactic encourages customers to try your product.
The hope is that once customers switch, they’ll stay with your brand. Eventually, you can raise prices to a standard rate. This approach can help create initial market awareness.
When Is Penetration Pricing a Smart Move?
This tactic isn’t a one-size-fits-all solution. Penetration pricing might be challenging with already low pricing options. It often works best under specific market conditions.
Market penetration pricing is often used for items like internet, cable, and groceries. Some companies use it for banking services and airline tickets. Think of mass-market products with high price elasticity, where a small price change can significantly alter buying patterns.
It works best when there’s strong demand and consumers can easily switch brands. An established market benefits from employing penetration pricing to stand out from the competitive market. It can help attract customers to build the initial customer base.
The Not-So-Pretty Side of Low Prices
While rapid growth is appealing, this tactic has challenges. There are downsides that can severely impact some brands.
Operating on thin, or even negative, profit margins for an extended period can be risky. One major hurdle is maintaining long-term customer retention and long-term success.
Customers who initially come for the bargain price often leave when competitors make new offers. Some brands find that low initial pricing doesn’t easily convert customers long-term. Offering products at low prices initially attracts customers, but there are no guarantees they will stick around to create brand loyalty.
How OpenAI Uses Penetration Pricing Strategy
OpenAI, the company behind ChatGPT, took a distinct approach. They offered a free access plan when they initially introduced the service.
They also introduced a paid plan, ChatGPT Plus, at $20/month, significantly below the competition. This plan provided premium features, like advanced capabilities. They set records by attracting a reported 200 million weekly users, as reported by The Verge.
Navigating Customer Retention with Penetration Pricing Strategy
A significant challenge is keeping your customers, especially after acquiring them through initial low-balling. A penetration pricing strategy relies on long-term strategy to make it successful.
Building customer loyalty from the start should be a priority. You need your first customers to understand the value they receive, so they don’t switch to another business.
Make it a point to offer exceptional support or bonus items. This will allow them to see the increased value, building customers long-term.
Making Sure That Your Product Isn’t Perceived As Lower Quality
People often see a significantly lower-priced product and immediately wonder, “What’s wrong with it?”. This is a common psychological pitfall that requires careful planning and messaging to manage the risk. This penetration pricing risk has to be managed.
There’s always the concern that your product could be perceived as lower in quality than higher-priced alternatives. So, emphasize customer value in any penetration pricing model you create.
The goal of penetration pricing strategies is to create an offer that is an incredible value. While communicating the long-term plan for pricing is essential.
How Does This Compare to Other Pricing Methods?
It’s easy to confuse penetration pricing with other strategies focused on attractive customer costs. Let’s examine the key differences to maintain focus.
Competitive pricing involves keeping your prices aligned with others in the market. It is not about trying to undercut their value to your consumer base. Competitive pricing focuses on balancing prices in a competitive market.
On the other hand, penetration pricing sets rates at bargain prices. These prices are, typically, at the cost of very thin short-term profits. You will eventually increase the price and need to plan the best marketing strategy for that transition.
Thinking Outside the Box: When Penetration Pricing Isn’t the Answer
Knowing when *not* to use a strategy is as crucial as knowing when to use it. A poorly executed penetration pricing strategy can hurt you more than your competition.
Penetration pricing has an ideal context. Certain types of businesses or industries may not be suitable for this pricing strategy.
Micro-Niches Can Be A Very Different Story
In these highly specialized markets, customers are more focused on specific capabilities and trusted long-term solutions. Some users may stick with their current vendor for things that seem too good to be true. Often, you’ll be battling established brands and customer loyalty.
Unless your product offers something significantly better, simply lowering the price may not be enough. Penetration pricing can become less profitable long-term in a niche market. A penetration pricing strategy relies on your long-term pricing items to become profitable, as initial offering periods can lead to losses.
A company will want to look at all of the data first. A loss leader strategy can drive sales volume. Established companies use this to get customers to consider additional items, as well.
Are You In An Already Crowded Market?
In markets crowded with identical offerings, this tactic could be risky. If a space is too saturated, prices might naturally drop quickly.
The situation depends on your offer. You will need to be able to show enough of a long-term unique benefit to use it in such markets to increase market share.
Established brands often can offer additional things beyond pricing. The best marketing strategy considers all of this before a cell phone company, for example, employs penetration pricing in the market. The pricing optimization is complex.
Planning The Next Phase
It should be known this goes well beyond the price tag. Consider the timing of introducing “full pricing” and how pricing fits into overall strategies.
| Strategy Consideration | Details | Additional Factors |
|---|---|---|
| Clear Communication | Clearly communicate why prices are set the way they are. It should never raise doubts, concerns, or questions about product quality. | It should feel more like an “Introductory Offer,” which can create urgency. |
| Setting a Timeline | Determine your timeline and the number of customers you anticipate onboarding. | Don’t solely rely on acquired customers. Consider customer churn and incorporate those goals into your strategies. |
| Maintaining Good Customer Relations | Prioritize customer engagement. People who receive great value tend to want more. Consider all levels of customer support to make them your strongest long-term customers. | If customer relationships are positive, focus on your new customers as pricing increases for newcomers only. Some suggest offering existing clients “grandfathered” options or benefits to reward them for their early adoption. |
| Price Intelligence | Use price intelligence data to see what your target market is willing to pay. | You will also want to factor in the costs of raw materials in order to know what pricing is sustainable, both short and long-term. |
Case Study: Netflix
A clear example of penetration pricing in action is Netflix. The company avoided significant price hikes while steadily growing its customer base. Today, Netflix holds 51% of streaming subscriptions in the U.S. and has a monthly churn of around 2%.
Their offer was disruptive to Blockbuster in the late 1990s. For just $15.95/month, people received a better movie selection than Blockbuster could offer.
They also offered an easy “no return-by date” instead of a physical return. That price was less than $1/DVD, which was much lower than what Blockbuster charged. This offering forced a business shift to an online-first platform, attracting many to switch.
Conclusion
If you’re launching a new product or brand, you need to create awareness. A well-executed penetration pricing strategy could be a helpful solution.
This method can potentially increase how quickly people switch from a competitive product or service. It can lead to an increase in the customer base if your strategy works.
It’s crucial to research before taking this penetration strategy pricing approach. While it can be a smart short-term strategy to capture immediate customer relationships, be mindful of brand loyalty and price wars. A long-term strategy is critical, so offering free things and discounts should only be considered if the plan allows for you to gradually raise prices to maintain profits and have a successful penetration pricing strategy campaign.
