PENETRATION PRICING

What is Penetration Pricing?

Penetration pricing is a marketing strategy used by businesses to attract customers to a new
product or service by offering a lower price during its initial offering. The lower price helps a
new product or service penetrate the market and attract customers away from competitors.
Market penetration pricing relies on the strategy of using low prices initially to make a wide
number of customers aware of a new product.
The goal of a price penetration strategy is to entice customers to try a new product and build
market share with the hope of keeping the new customers once prices rise back to normal levels.

Advantages of Penetration Pricing

 High adoption and diffusion: Penetration pricing enables a company to get its product
or service quickly accepted and adopted by customers.
 Marketplace dominance: Competitors are typically caught off guard by a penetration
pricing strategy and are afforded little time to react. The company is able to utilize the
opportunity to switch over as many customers as possible.
 Economies of scale: The pricing strategy generates a high sales quantity that enables a
firm to realize economies of scale and lower its marginal cost.
 Increased goodwill: Customers that are able to find a bargain in a product or service are
likely to return to the firm in the future. In addition, this increased goodwill creates
positive word of mouth.
 High inventory turnover: Penetration pricing results in an increased inventory turnover
rate, making vertical supply chain partners, such as retailers and distributors, happy.

Disadvantages of Penetration Pricing

 Pricing expectation: When a firm uses a penetration pricing strategy, customers often
expect permanently low prices. If prices gradually increase, customers may become
dissatisfied and may stop purchasing the product or service.
 Low customer loyalty: Penetration pricing typically attracts bargain hunters or those
with low customer loyalty. Said customers are likely to switch to competitors if they find
a better deal. Price cutting, while effective for making some immediate sales, rarely
engenders customer loyalty.
 Damage brand image: Low prices may affect the brand image, causing customers to
perceive the brand as cheap or poor quality.
 Price war: A price penetration strategy may trigger a price war. This decreases overall
profitability in the market, and the only companies strong enough to survive a protracted
price war are usually not the new entrant who triggered the war.
  Inefficient long-term strategy: Price penetration is not a viable long-term pricing
strategy. It is usually a better idea to approach the marketplace with a pricing strategy that
your company can live with, long-term. While it may then take longer to acquire a
sizeable market share, such a patient, long-term strategy is more likely to serve your
company better overall, and less likely to expose you to severe financial risks.

Penetration Pricing is best suited where:

 The product being sold is highly elastic-that is very responsive to price change. A
reduction in price will generate a greater than proportionate change in quantity
demanded.
 The firm can benefit from economies of scale and become a market leader.
 The firm is operation in a market that is expanding and the prospect of increased
competition in looming.
 The firm is financially sound and is able to offset any cost incurred in the short
run that cannot be covered by revenue generated.

Examples of Penetration Pricing

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.
1. Netflix
Netflix is the perfect example of penetration pricing done right. We have often heard people
complaining about their Netflix subscription prices going up or their one month of free
subscription ending. Nevertheless, despite occasional grumbling, people are completely fine with
paying the higher subscriptions for the unending flow of good media content. Today, Netflix is a
market leader constituting 51% of streaming subscriptions in the United States. Other OTT
platforms are following suit by deploying penetration pricing to attract new customers. 
2. 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. Over the past five years, we estimate the firm
has increased Internet access market share in the areas it serves from about 56% to 64%, with
share coming nearly entirely from the phone companies. While that share shift may seem
modest, it implies that Comcast’s customer base in a given area is now more than 60% larger on
average than its rivals’, up from around 20%. At the end of a specified period, the price
increases. Most consumers continue paying the higher bill, but some jump to a new provider
offering an introductory rate.
3. 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.
4. Gillette 
One player that comes to mind while talking about a successful penetration pricing strategy is
Gillette. With its razors often given away for free or priced lower than its competitors, it has
been able to retain its position as a market leader for years. The profits Gillette loses from selling
its razors for low prices, it gains from razor blades, attachments, and accessories that are priced
at a premium. In the fast-moving consumer goods (FMCG) space, an effective way to
differentiate your brand from competitors, who are all selling similar products, is by offering
disruptive prices when you are new to the market and developing brand recognition. 
5. 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, for example, sponsoring events and
providing sample packs to attendees. 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. 
In another notable example, Starbucks, a premium coffee chain, often introduces new and
seasonal coffees and drinks at a lower price point to encourage consumers to try these new items.
Once consumers get accustomed to these items on the menu and show a positive response,
Starbucks then retracts the penetration pricing offers and starts selling these at the usual non-
discounted prices. 
Apart from these key examples, we see penetration pricing strategies deployed across a range of
industries including hotels and airlines and consumer product 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 market place. Smart, AI-driven retail solutions can give
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.