Penetration Pricing: The Winning Strategy to Get Customers Quickly

In the ever-evolving world of business, pricing strategy plays a critical role in determining the success or failure of a product or service. Penetration pricing is a pricing approach that has become increasingly popular in recent years, particularly among startups and businesses seeking to quickly gain a foothold in a new market.

In this article, we’ll explore penetration pricing, how it works, and some examples of companies that have successfully used it to grow their businesses. Let’s dive in!

What is Penetration Pricing?

Penetration pricing refers to a pricing strategy in which a business sets a low price for the products to gain market share. The goal of penetration pricing is to attract a large number of customers quickly and establish the company as a viable competitor in the market. Penetration pricing is often used by businesses new to a market or launching a new product line that finds themselves in need of building brand awareness and gaining customer loyalty.

Basis of Penetration Pricing

Penetration Pricing is a pricing strategy in which the price of a product is set low to reach a wider market and initiate promotion. The strategy is based on the idea that a low price will entice customers to try a new product, which in turn will create buzz and generate positive reviews.

What Does Penetration Pricing Refer to?

Penetration pricing is a strategy where a company sets a low price for its product or service to gain market share quickly. By offering a lower price than competitors, the company aims to attract a large number of customers and establish a foothold in the market.

Penetration Pricing Strategy

Penetration pricing involves setting a low price for a product or service, which is typically lower than the market average. The aim of this strategy is to attract a large number of customers quickly, which can help the company gain a foothold in the market and build brand awareness. Once the company has established a customer base, it can gradually increase its prices to closely match those of its competitors.

Companies that Use Penetration Pricing

Many companies have successfully used penetration pricing to gain market share and establish themselves as viable competitors. As we briefly mentioned earlier, one notable example is Uber, which initially offered prices that were significantly lower than those of traditional taxi companies. This allowed Uber to quickly gain market share and establish itself as a major player in the transportation industry.

Another example is Amazon, which offered lower prices than traditional brick-and-mortar bookstores when it first launched its online bookstore. This allowed Amazon to quickly gain market share and establish itself as a leader in the ecommerce industry. Below are examples of several companies that have used the penetration pricing strategy.

Uber

When Uber first launched its ride-sharing service, it offered prices that were significantly lower than those of traditional taxi companies. Over time, Uber has gradually increased its prices to be more in line with those of traditional taxi companies. Still, it was the initial penetration pricing strategy that helped the company establish itself as a major player in the industry.

Amazon

When Amazon first launched its online bookstore, knowing most people preferred buying their books from their local bookstore, the ecommerce giant knew it had to find a way to encourage users to try buying online. To achieve this, Amazon relied profoundly on penetration pricing. The company started with very low prices which then allowed it to quickly gain market share and establish itself as a leader in the ecommerce industry. Today, Amazon continues to use penetration pricing in various ways, such as offering lower prices on certain products and services, to attract customers and maintain its dominant position in the market.

Streaming companies

As you can already tell from this section, there are many companies that use penetration marketing, including streaming service companies. Even if your business follows a subscription-based model, you can still choose to give penetration pricing a try. There are many streaming services that use penetration pricing strategies to grow their subscribers by offering an initial free trial period or a one week for half the monthly price for example. This way potential subscribers find themselves eager to sign up and see for themselves what kind of content they’ll be getting for their money.

Popular music streaming service Spotify for example, offers a three-month free trial of their Premium membership. There are also times the streaming giant offers deals like four months of Premium membership for only $0.99 to encourage users to try their paid subscription. With offers like this, users of the platforms immediately feel encouraged to sign up, once again demonstrating the foundation and success of penetration marketing.

From online marketplaces like Amazon to streaming services like Spotify, the number of companies that find this strategy useful is wide and continues to grow. Even banks, online education programs, online course sellers, and airline companies find the strategy useful and use it to increase their sales and stand out from the competition.

Price Skimming vs Penetration Pricing

It is necessary to understand the differences between pricing skimming and penetration pricing. Price skimming involves setting a high price for a product or service when it is first introduced to the market. The idea is to maximize profits from early adopters who are willing to pay a premium for the product. As competition increases and the product becomes more widely available, the price is gradually lowered to appeal to a broader range of customers.

Penetration pricing, however, involves setting a low price to quickly gain market share. This is often used by companies new to a market or launching a new product line and need to build brand awareness and customer loyalty. The aim is to attract a large number of customers quickly and establish the company as a viable competitor in the market. Once the company has established a customer base, it can gradually increase its prices to more closely match those of its competitors.

Market Penetration Pricing Strategy

Market penetration pricing is a specific type of penetration pricing strategy that involves setting a low price to enter a new market. The aim is to quickly gain a foothold in the market and establish the company as a viable competitor. This is often used by companies that are expanding into new geographic regions or product categories.
One example of a company that has used market penetration pricing successfully is Walmart. When Walmart entered the grocery market, it offered lower prices than its competitors to attract customers and gain market share. Over time, Walmart has been able to increase its prices and maintain its position as a dominant player in the market.

Advantages of Penetration Pricing

There are many advantages of Penetration Pricing. Here are a few,

• High adoption and diffusion. Penetration pricing enables a business to swiftly gain client acceptance and adoption of its product or service.
• Dominance in the market. A penetration pricing approach generally catches rivals off guard and gives them little time to respond. The business can take advantage of the chance to convert as many clients as it can.
• Economies of scale. A firm can achieve economies of scale and lower its marginal cost since the pricing strategy results in high sales volume.
• Improved customer loyalty. Consumers who can get a good deal on a good or service are more inclined to support the company again. Also, this heightened goodwill generates favorable brand awareness.
• Increased inventory turnover. Vertical supply chain partners like retailers and distributors are pleased with penetration pricing’s enhanced inventory turnover rate.

Companies that Use Penetration Pricing

Many companies have successfully used penetration pricing to gain market share and establish themselves as viable competitors. As we briefly mentioned earlier, one notable example is Uber, which initially offered prices that were significantly lower than those of traditional taxi companies. This allowed Uber to quickly gain market share and establish itself as a major player in the transportation industry.

Another example is Amazon, which offered lower prices than traditional brick-and-mortar bookstores when it first launched its online bookstore. This allowed Amazon to quickly gain market share and establish itself as a leader in the ecommerce industry.

Conclusion

In conclusion, while price skimming and penetration pricing are both pricing strategies that aim to increase profits and gain market share, they differ in their approach and timing. Market penetration pricing is a specific type of penetration pricing strategy that involves setting a low price to enter a new market. Many companies have successfully used penetration pricing to gain market share and establish themselves as viable competitors, including Uber and Amazon. By understanding these pricing strategies and how they can be applied to different situations, businesses can make informed decisions about their pricing and positioning in the market.

Now that we have covered the base with Penetration Pricing, you can find two more guides on how to price your products!

• Antiques Pricing Guide: Identifying, Appraising, Pricing
• How to Price a Product for Retail Business Beginners

• How to Price Your Products? A Science Backed Answer
• Three Pricing Models You Can Implement in Your Online Store
• Penetration Pricing: The Winning Strategy to Get Customers Quickly
• How to Calculate Price Elasticity of Demand