You are currently viewing What is Penetration Pricing Strategy – Pros, Cons, Differences, Examples & Strategies

What is Penetration Pricing Strategy – Pros, Cons, Differences, Examples & Strategies

💰💲💁‍♀️🎯 You have probably seen the pricing strategy in use, even if you have never heard the exact term “penetration pricing strategy” before.

However, in the fiercely competitive race for market share, some businesses will enter a market with shockingly low prices in an effort to win over new clients. A penetration pricing strategy is what this is.

You have probably seen a variety of new internet or cable providers enter the market and try to entice customers with low introductory prices, free streaming services, or extra channels. That sums up a penetration pricing strategy. 

💁‍♀️🏆 Let’s jump right into the fundamentals and check if a penetration pricing model is a good fit for your business and analyze precisely what is penetration pricing strategy. 

We’ll compare penetration pricing to its close relative, the price skimming pricing strategy, look at a well-known penetration pricing strategy example, discuss its benefits and drawbacks, and offer advice to help you decide if it’s the best course of action for your business.
⏰ Without further ado, Let’s get started …………..

👉  What Is Penetration Pricing?

By presenting a new product or service at a lower price during its initial offering, businesses can draw customers to it using the marketing strategy known as penetration pricing.

A new product or service can enter the market more easily and draw customers away from competitors by offering a lower price. Pricing for market penetration relies on the tactic of using initially low prices to make a large number of customers aware of a new product.

Price-setting at first-rate levels to draw customers and quickly expand market share.

Meg Prater, a managing editor of the HubSpot Blog, explains:

“Because this strategy necessitates companies to cut prices to almost below market value, it’s typically used by start-up companies in a phase of rapid growth that is ready to accept early losses.” These setbacks are seen as a necessary sacrifice to increase market share and draw customers away from competing companies.

A price penetration strategy attempts to persuade customers to try a new product in order to increase market share. 

📍 Examples of penetration pricing include a bank offering a free checking account for six months or an online news website offering one month of a subscription-based service for free.

KEY TAKEAWAYS

  • Using a lower price at first, businesses use the penetration pricing strategy to draw customers to a new good or service.
  • A new product or service can enter the market more easily and draw customers away from rivals by offering a lower price.
  • Penetration pricing carries the risk that new customers may initially choose the brand but switch to a competitor once prices rise.

🎁  Recommended:  Struggling with content duplicacy? This complete guide to what is plagiarism will help you make unique content in no time.

👉 Rationale Behind Penetration Pricing

A penetration pricing strategy is frequently used by new competitors to quickly gain a sizable portion of the market share. One of the simplest ways to distinguish new entrants from established market players is through price. 

This pricing strategy’s main objective is to:

  • Capture market share
  • Create brand loyalty
  • Switch customers from competitors
  • Create a sizable demand while attempting to take advantage of economies of scale.
  • Drive competitors out of the market

Conditions where penetration pricing is successful include:

  • When there is little product differentiation
  • Demand is price-elastic
  • where a mass market can be served by the product (and, therefore, for utilising economies of scale)

🔴 Recommended Blog For You: Want to expand your social media marketing strategies to boost brand awareness, visibility, conversion & sales?  Go through this Snapchat for Business (2022): The Complete Marketing Guide With Proven Strategies

👉  Who Uses Penetration Pricing?

A few types of businesses tend to use penetration pricing strategies.

1-  New entrants: 

Market penetration pricing tends to come from new entrants into an existing market who attempt to pick off customers from the market leaders. The premise is that by offering notably low prices in their initial offering, these companies will peel off customers from brands that charge higher prices.

2-  Established brands breaking into new markets: 

A penetration pricing strategy may also be used by large, mass-market brands seeking to enter a lucrative new market. For instance, some major online retailers have introduced new products from their various in-house brands using penetration pricing strategies.

3-  Price-elastic brands: 

Brands with goods whose demand is highly influenced by price or whose price elasticity may be more likely to use penetration pricing strategies.

🟠  Recommended:  To boost digital marketing strategies in the right direction, you need to use the top proven suggestions & for that go through this complete guide to what is Press Releases & how to write them perfectly.

👉  How Does Penetration Pricing Work?

There are five main methods of pricing: price skimming, premium pricing, economy pricing, bundle pricing, and penetration pricing. Particularly, competitor pricing has a significant influence on penetration pricing.

With this pricing strategy, a fresh product or service is provided for less money. The tactic enables the first-time offering to draw in new clients by luring them away from rival businesses.

An organization can more successfully enter an established market by launching a new good or service at an alluringly low price. They can raise potential customers’ awareness very quickly. In turn, the tactic ruins already-established companies in the industry.

A business that uses a successful penetration strategy will retain customers over time rather than just gaining them for a single transaction.

✅  There are 2 ways to do this.

1-  Build up economies of scale: 

By keeping prices low, a startup business can develop brand loyalty if it can attract a sizable number of new customers. Massive sales volumes that keep marginal costs low and enable brands to thrive on the sheer volume of transactions may be necessary for this to be possible.

🔷  Create Your Online Store: If you own a small business, you must read this comprehensive guide to what is WooCommerce and how to set up an online store using WordPress and the WooCommerce plugin.

🏆👉💻Start Building Your WordPress Site Today! 💻💁‍♀️💰

2-  Gradually raise prices: 

Another method of price penetration is to eliminate all rivals before gradually raising prices to become profitable.

When a company is just starting out, it can do this if it has access to a lot of borrowed capital. On early transactions, they essentially lose money, and once the competition is priced out of existence, they gradually ramp up to a relatively high price that can be sustained over the long term.

Long-term brand profits may result from this, but customers may suffer if competitive markets are eliminated. Such monopolistic business practices are also prohibited in some jurisdictions.

📌In short: New customers may be initially persuaded to buy a product or subscribe to a service by penetration pricing strategies. When the business raises the price, the strategy may also cause churn or loss.

Product experts are aware that a penetration pricing strategy without ideal price points and without customer support is not a viable long-term strategy.

This pricing strategy should be avoided by businesses that can’t handle immediate losses.

🔷  Recommended:  Go through this quick guide to what is domain name and what you need to know before choosing a strong domain. 

👉  Advantages of Penetration Pricing

There are definite benefits to penetration pricing for both businesses and consumers.

1-  Rapid customer conversion: 

When comparing brands, some consumers believe that price is the most important factor. Offering the lowest price on the market enables producers, service providers, and merchants to attract new customers quickly.

2-  Customer conversion: 

If you launch a product and use effective marketing, penetration can help you draw customers away from competitor companies. Also, learn what is lead generation thoroughly which will guide you to uplift your ability to get quality leads to boost your conversion rate.

3-  Reduced competition: 

As a result of your penetration strategy, competitors may be discouraged from entering your market because they are unable to match your price. 

4-  High adoption and diffusion: 

A business can quickly gain customer acceptance and adoption of its product or service by using penetration pricing.

5-  A path to long-term market dominance: 

Companies have used penetration pricing tactics to endure market dominance. They achieve this by operating at enormous economies of scale, where millions of low-profit transactions add up to enormous overall profits.

🔴 Recommended Career Guide For You:  Get to know the latest updates for the scope of digital marketing in 2022 so that you can build your digital career in the right direction.

6-  Economies of scale: 

The pricing strategy generates high sales volumes, allowing a company to achieve economies of scale and lower its marginal cost.

7-  Increased goodwill: 

Customers who can get a good deal on a product or service are more likely to use the business again in the future. Additionally, this heightened goodwill generates favourable word of mouth.

8-  The short-term benefit to customers: 

Customers benefit from competitive markets, especially those who are willing to give up brand loyalty in exchange for a lower price. 

9-  High inventory turnover: 

Increased inventory turnover rates as a result of penetration pricing are pleasing to vertical supply chain partners like retailers and distributors.

💁‍♀️🚀 Also Read: if unable to sell your products or you are struggling with it then go through this complete guide on how to sell products online for free which will provide you with top proven tricks and tips to boost your online selling.

👉  Disadvantages of Penetration Pricing

Markets can be upended by penetration pricing, but this disruption is not always advantageous.

1-  Predatory pricing: 

Predatory pricing, where brands with large amounts of capital can afford to take huge losses, can quickly develop from penetration pricing. Conversely, their rival small businesses simply cannot afford to have negative profit margins.

As a result, the mom-and-pop shops are eliminated by the big brands, which fosters an environment conducive to monopolies. Predatory pricing is therefore prohibited in the US.

2-  Low customer loyalty: 

Pricing for penetration frequently draws bargain hunters or people with low customer loyalty. If they discover a better offer, they said customers are probably going to switch to competitors. While price reduction can result in some quick sales, it rarely fosters long-term customer loyalty. 

3-  Unsustainable price wars: 

Predatory pricing can start a price war with established brands. These can be fantastic for customers who switch between competitors frequently in search of lower prices and better service. Price wars, on the other hand, frequently become unsustainable over time and force businesses to exhaust all available cash and credit.

4-  Damage brand image: 

Low prices could harm a company’s reputation by giving consumers the impression that the brand is subpar or cheap.

🏆 Bonus:  Want to start a website, blog, or online store, Bluehost can help you get started with a hosting plan that’s tailored to your needs and comes with 24/7 technical support.

5-  Diminished brand image: 

Being the cheapest place in town isn’t always beneficial. Customers sometimes mistakenly believe that low prices equal low quality, especially when a business lacks a long history of good performance.

6-  Price war: 

A price war might be started by a price penetration strategy. This lowers the market’s overall profitability, and the only businesses able to endure a protracted price war are typically not the newcomers who started it.

7-  Inefficient long-term strategy: 

Price penetration is not a sustainable pricing strategy over the long term. Generally speaking, it is better to enter the market with a pricing strategy that your business can abide by in the long run.

Even though it might take longer to gain a sizable market share, such a patient, long-term approach is more likely to benefit your company overall and be less risky for your finances.

💁‍♀️💻 Want To Advance Your Career In The Most Booming Industry?🚀👨‍🎓

🎯🏆 Join Live Practical Digital Marketing Course & Boost Your Digital Skills From Scratch To Advance With Result-Oriented Easy Strategies

🏆Reach Out To Expert Trainers Of Marketing Fundas Today! 

Enroll Now📞👈🚀

👉  Penetration Pricing Vs. Loss Leader Pricing Vs. Predatory Pricing

There are a few pricing tactics that resemble penetration pricing on the surface but have significant differences. Take a look at each now.

A-  Penetration pricing: 

In this pricing strategy, a company sets a low price for a new good or service in an effort to quickly take over a sizable portion of the market. The company typically places a time limit on the introductory rate because it intends to raise prices in the future.

B-  Loss leader pricing: 

In half of the states in the United States, loss leader pricing, a slightly different marketing tactic, is prohibited. To draw in more customers, businesses often sell a good or service at a loss or with a small profit margin. Theoretically, after purchasing these “loss leaders,” customers will use their savings to purchase other, more profitable products from the business.

C-  Predatory pricing: 

In the United States, predatory pricing is forbidden. A company that uses predatory pricing drastically reduces costs to eliminate rivals from the market. If left unchecked or unrestrained, the company develops a monopoly. The company then raises prices above market rates to make up for losses and keep its position. Predatory pricing does not benefit consumers and eliminates the possibility of healthy competition.

🔴 Recommended Career Guide For You: Complete your Digital Marketing Course in Delhi from the top industry professionals and kick-start your digital career in the right direction with complete guidance.  

👉 Skimming vs. Penetration Pricing: What’s the Difference?

When businesses seek out customers who are already considering their products, price skimming is a successful pricing strategy. The goal is to maximise immediate profits by initially setting your prices high.

At first, you make fewer sales, but they are more lucrative. The price is then gradually lowered over time to draw in new clients.

Skimming gives competitors the chance to undercut your prices in an effort to win over your clients. A high-quality product is, therefore, necessary to keep your value-oriented customers’ attention.

In contrast, penetration pricing uses low prices to draw in new clients and expand the product’s market share. By using this strategy, you can enter the market quickly and build a solid clientele.

Short-term profits are lower, but a large number of early sales makes up for the low margins. Last but not least, you can raise the price as demand rises.

🔷  Recommended Dropshipping Guide: Visit this complete guide to what is Shopify dropshipping if you are new to dropshipping and want to advance your dropshipping approach to earn more money online.

👉 When to use skimming or penetration

Depending on what they want to maximize—market share, overall profit, customer lifetime value, or profit margin—companies choose skimming or penetration.

Their choices may be affected by things like limitations on production capacity or the capacity for mass production. Their target market and price elasticity may also affect the strategy they choose.

  When to Use Price Skimming

The following are some scenarios in which you might think about applying the skimming pricing strategy:

1-  Innovative product: 

Neither a reference price nor a direct competitor exists for your new product. In this situation, you are establishing a market and competing in it.

2-  Target customer: 

You target extremely picky clients or early adopters who, regardless of cost, want to get their hands on the most cutting-edge products first.

3-  Unknown demand: 

You might set a high price for your product if you don’t know how much demand there is for it in order to cover production costs, including potential high-cost promotional activities.

4-  Low price elasticity: 

The price of the product is relatively inflexible in the beginning until the company establishes a strong position for it in the market. Due to a high price, skimming enables you to make money despite low sales volume. Sales volume may increase and permit a price reduction once the product establishes a position in the market.

5-  Product portfolio: 

You can combine skimming with other pricing techniques and suggest various products when you need to launch a product in a portfolio, that is, with other items that are a part of the same collection.

You can launch a high-end product first, then one with fewer features and a lower price. You could also add a higher-quality product after starting with one offer.

In both situations, you scan the market for a picky client while providing alternatives for more budget-conscious clients.

🔷  Recommended Google Guide:  Here’s a complete practical guide to what is google analytics which helps you to understand how to track every important aspect of your site and will help you to improve your digital approach in the right direction.

  When to Use Penetration Pricing

The following scenarios call for the use of penetration pricing:

1-  Existing competition: 

Your new product is already available due to the fact that trusted brands sell it. Pricing your product competitively can draw clients from these competing brands and entice them to try your offering.

2-  Introductory campaign: 

To launch a product, you can create a low-cost initial offering, and once it finds success in the market, raise the price. Additionally, you can provide free service trials or product samples. The objective is to bring in new customers and keep them after the price stabilises.

3-  Entry barriers: 

Setting a low price makes it difficult for them to charge a lower price than yours or draw customers away from your products, which is useful if you want to build entry barriers and stop new competitors from entering the market.

4-  High price elasticity: 

Professionals refer to demand as “price elastic” when a low price increases sales volume or draws in more customers. For instance, the demand for a product is flexible if there are many alternatives and the customer can choose between your product and a comparable item from a different brand. Penetration pricing is a good choice in this situation.

5-  Existing market share: 

You already control a sizeable portion of the market and have the capacity to transact a lot of merchandise.

🔷  Recommended Blogging Guide:  Get to know what is blogging & how to start blogging from scratch if you want to earn money online with fewer efforts but with the right approach. 

👉  Some Penetration Pricing Examples For You

1-  Legacy brands

In the market for streaming videos, penetration pricing is demonstrated. In order to maintain their current subscriber bases, legacy brands frequently allow their prices to rise over time.

2-  Upstart streaming services

In order to attract potential customers looking for lower prices, upstart streaming services have launched their initial offerings at much lower price points. The challengers believe that some customers will choose low prices over brand loyalty when choosing a streaming service provider if they are forced to choose between two options.

🟡  Recommended: This complete guide to what is Youtube Marketing will help you learn everything about how to boost your video to the top with the best effective strategies.

3-  Costco and Kroger

Market penetration pricing is used by two significant grocery store chains, Costco and Kroger, for the organic products they sell. Foods that are organic are being sold for less money. They are effectively using penetration pricing to grow their wallet share. Although this tactic might be dangerous for small grocery stores, Kroger and Costco can use it because of economies of scale.

4-  Grocery store 

The grocery store chooses a penetration pricing strategy to offer organic products at a discount. Customers are given samples at the supermarket, which also promotes its fresh goods. The supermarket makes money on its new organic goods because of high sales volumes and increased demand.

🟡  Recommended Hosting Guide: Getting the right hosting services from a top hosting company will help you to strengthen your brand automatically and for that, you must go through this Bluehost Review 2022 to know which hosting plan will be great for your site.

🏆👉💻Start Building Your WordPress Site Today! 💻💁‍♀️💰

5-  Netflix 

Netflix serves as the ideal illustration of penetration pricing done correctly. People frequently voice their displeasure when their Netflix subscription costs increase or when their free trial period expires.

People are completely okay with paying the higher subscription fees for the never-ending supply of high-quality media content, despite the occasional complaints.

In the US, 51% of streaming subscriptions are currently held by Netflix, making it the market leader. In order to draw in new clients, other OTT platforms are adopting penetration pricing in a similar fashion.

6-  Gillette

When discussing a productive penetration pricing strategy, one company that immediately comes to mind is Gillette. It has been able to maintain its position as the market leader for years because its razors are frequently given away for free or priced lower than those of its rivals.

Gillette makes more money from high-end razor blades, attachments, and accessories than it does from low-priced razor sales.

Offering disruptive prices when you are first entering the market and building brand recognition is an effective way to set your brand apart from rivals who are all selling similar products in the fast-moving consumer goods (FMCG) sector.

7-  Internet and cable providers

In order to entice new subscribers, cable companies frequently offer free streaming services or extra channels. Perks like these are still useful even though they typically have a time restriction. These bonuses and incentives assist businesses in standing out in a crowded market.

💰🧲  Recommended Amazon Guide: Visit this Complete practical Guide to How to Sell on Amazon or want to Become a professional Amazon Seller 2022

👉 What to Have in Mind When Creating a Penetration Pricing Strategy

A-  Is your product price-elastic? 

Effective penetration pricing strategies can frequently be used with price-elastic products or those whose demand changes as the price changes. Higher prices could hurt sales and restrict your growth if your product launches during a crucial launch period. In many instances, a low price can give new businesses with price-elastic offerings a foot in the door.

B-  Is your strategy legal? 

It can be difficult to distinguish between predatory pricing and less ethical tactics like loss leader pricing. Loss leader pricing is the practice of selling some products at a loss in order to persuade customers to purchase more expensive, more profitable products.

Predatory pricing is when a business severely undercuts its market to eliminate competitors and create a monopoly. When that happens, the company dramatically raises prices to make up for any losses while still holding a monopoly on the market.
All states have laws against loss leader pricing and all states have laws against predatory pricing. Make sure everything you do is legal if you plan to use penetration pricing.

C-  How much faith do you have in your product or service? 

The foundation of a penetration pricing strategy is the idea that customers will eventually be willing to pay more than the price you enter the market at. You must have confidence in the long-term viability of your value proposition if you want to make use of the tactic.

🏆 Some know-how: Want to start and boost your freelance copywriting career with the right guidance then this complete guide to What is Freelance Copywriting: Ultimate Beginner’s Guide 2022 || Zero to Mastery Level is the go-to option for you

👉  Some Of The Most Important Practical Guides To Optimize Your Ad Campaigns

✅  A Complete Practical Guide To What Is Instagram Ads & How To Optimize It To Strengthen Brand Awareness, Engagement, Conversions & Sales.

✅  A Complete Practical Guide To What Is Linkedin Ads & How To Optimize It To Strengthen Brand Awareness, Engagement, Conversions & Sales.

✅  A Complete Practical Guide To What Is Snapchat Ads & How To Optimize It To Strengthen Brand Awareness, Engagement, Conversions & Sales.

✅  A Complete Practical Guide To What Is Youtube Ads & How To Optimize It To Strengthen Brand Awareness, Engagement, Conversions & Sales.

✅  A Complete Practical Guide To What Is Twitter Ads & How To Optimize It To Strengthen Brand Awareness, Engagement, Conversions & Sales.

👉   Conclusion: Take Your Penetration Pricing Strategy To The Next Level (Starting Low, Aiming High)

Any company that wants to change the course of the industry must overcome the challenge of market penetration. A penetration pricing strategy seeks to promote adoption by using low initial prices to expand a customer base.

It may be a successful strategy for attracting customers, cultivating goodwill, and differentiating oneself from business competitors. But as a business grows, it can also result in uncommitted clients and slim profit margins.

✋ Hey Wait!! 

💁‍♀️🎯 Looking For Professional Digital Marketing Services To Boost Your Audience Engagement, Conversion & Sales? 

🏆Reach Out To An Expert Team Of Marketing Fundas Today! 

Call Now📞👈🚀

💬✍ Feel free to comment below if you have any questions regarding digital marketing blogs & courses. We’d love to read your comments & assist you in solving your problems. 

🏆👉 Also, read other quick guides mentioned below which will help you boost your digital journey. Contact Now to get best-in-class digital marketing services in Delhi from Marketing Fundas experts team. 

Happy Marketing! 😀👉📲💻📢

Recommended Blogs and Services
Tags: ,

Leave a Reply