In a market heavily driven by consumer trust and brand loyalty, many consumers are reluctant to switch brands or try new products. The barriers to entry in a retail market are very high both due to the heavy competition and demanding consumer base. Retailers need to think outside the box to make waves in the market to catch the attention of potential customers and convert them into loyal consumers.
That’s where penetration pricing comes in. Penetration pricing introduces customers to a new product at a steep discount, and often at a loss to the merchant. Businesses use this strategy to attract customers to a new product or service to win market share. The expectation with a penetration pricing strategy is that you’ll create brand loyalty and get customers to love your product, increasing their willingness to spend more down the road.
Here are five examples of penetration pricing strategies being put to work. Follow one of these penetration pricing strategies and you’ll be investing in long-term profit, even if you carry a short-term loss.
OTT Platforms
OTT platforms like Netflix and Disney+ are the perfect examples of penetration pricing done right. Netflix offers a free one month subscription to get subscribers hooked to its content, a freemium penetration pricing strategy and once it’s captured a new audience, it moves them to a paid subscription. Another example is of Disney+, which launched at $6.99/month (lower than competitors like Netflix) in 2019 and gradually increased prices to $10.99 per month in December 2022, after capturing a large subscriber base. By October 2024, it had raised the prices of its ad-free plan even further to $15.99 per month. These incremental price hikes over the years reflect Disney+’s strategy to attract a large subscriber base with attractive prices and increase rates as it gained market share and a healthy subscriber base. Other OTT platforms follow a similar penetration strategy to establish a foothold in new markets.
Internet Providers
Television and Internet providers are notorious for their use of penetration pricing — much to the chagrin of consumers who see massive sudden increases in their bills. Comcast/Xfinity, for example, regularly offers low introductory prices such as free or steeply discounted premium channels and low incremental costs of upgrading, for a year. At the end of a specified period, the price increases, a model that most telecommunication companies follow. Most consumers continue paying the higher bill, but some jump to a new provider offering an introductory rate.
Other utility providers also rely on penetration pricing. In a market increasingly dominated by smartphones, providers of landlines may use penetration pricing to get consumers to purchase a landline. Some even bundle these deals alongside cable, internet, and smart phone packages.
Smartphone Providers
Let’s take for example, two major smartphone operating systems that use vastly different pricing strategies.
Android aims for greater market penetration with a penetration scheme. Android phones, with Samsung leading the herd, are available at a steep discount or are priced at much lower costs compared to Apple, in the hopes that users will become loyal to the brand. This approach also opens a wider range of consumers up to the Android marketplace, while Apple embraces a skimming strategy, providing high-cost products that skim a small market share off the top.
A related penetration strategy popular among smart phone providers also uses penetration pricing. In this scheme, providers sell cheap or free smart phones in return for long-term contracts with customers. Consumers get excited about the cheap phone, and fail to notice that the contracts cost much more in the long-term than the phone would have.
Uber
The popular rideshare app Uber has successfully scaled its operations in multiple countries and is the market leader in the US. It depends on a penetration pricing strategy to establish its hold in a new market. For example: When Uber enters new cities and regions, it offers low ride prices to attract users and build its customer base. This penetration pricing strategy helps Uber quickly gain market share in the local transportation sector and win advantage over its competitors.
Food and Beverages
Many new foods are introduced to the market with a penetration pricing strategy. Some businesses even give packages of new products away by sponsoring events and offering free samples. One such example is of the popular energy drink brand, Redbull. Redbull uses a combination of skimming and penetration pricing strategies to enter new markets, depending on the competition in these markets. For example, in the US, it saw a gap in the energy drink category and introduced its products at a higher price using skimming pricing and in Europe, it used the penetration pricing strategy to break into the established energy drink market.
When you enter a supermarket, you often also see advertisements for introductory low prices for some fresh items, which are the perfect examples of penetration pricing. Costco and Kroger implement penetration pricing for the organic products they sell, to increase demand for these products. As there is a higher margin on organic products and due to economies of scale, these supermarket chains make money through increased demand and high sales volumes.
Risks Associated With Penetration Pricing
While penetration pricing is a tried and tested method used to break into new markets and build an audience base, it does have its downside. Penetration pricing can lead to price wars, brand dilution, and losses if not executed effectively. It could also attract only price-sensitive consumers that are not brand loyal. Brands need to be judicious in executing this strategy, do a thorough market research, analyze past trends and success stories and then lock in a strategy or a combination of pricing strategies that best suit their business goals and the market they wish to penetrate.
Conclusion
Penetration pricing is a popular strategy deployed across a range of industries including hotels and airlines and consumer packaged goods. Deploying this pricing strategy strategically can be a sure shot way to get a loyal customer following and establish your foothold in the highly competitive marketplace. But, penetration pricing might not be for all. For premium products, limited edition products, and luxury goods, this strategy could lead to brand dilution.
The best way to ensure a successful execution of penetration pricing is by using a smart, AI-driven price monitoring solutions. These tools can give brands and retailers 360 degree insights into the market and competitors in real-time, and help implement penetration pricing at the most favorable time and price points, for assured results.
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