Penetration pricing is a customer acquisition strategy where businesses offer lower prices than their competitors for a product or service.
As the name suggests, the pricing strategy aims to “penetrate” the highly competitive market to entice customers with a sweeter deal and retain them in the long run.
The objective of penetration pricing is to offer a discounted price upfront in exchange for increased brand awareness, better market share, and eventually the customer’s willingness to pay more in the future.
As the brand is not yet established, the organization differentiates itself from competitors by offering favorable pricing. Once this objective has been established, the company changes the prices with the intention to fortify brand loyalty and increase customer acquisition.
How Effective is Penetration Pricing?
When applied correctly, penetration pricing can work wonders. Moreover, it applies to businesses of all sizes and types. The pricing strategy has the potential to:
- Expand your market footprint.
- Increase sales volume.
- Reduce production costs.
- Initiate a quick inventory turnover.
What Are the Types of Penetration Pricing?
Penetration pricing is of three types:
1. Low introductory pricing.
The practice of introducing the product into the market with a low price to attract customers and then raising the price to make up for short-term losses once the product has gained a market foothold.
2. Free Trials
The goal of offering free trials is to impress potential customers so much that they will be willing to pay for the service or product in the long term.
3. Buy One, Get One or BOGO
Many businesses commonly use BOGO to encourage customers to buy new products or services in the market.
Penetration pricing use case
One of the best use cases of penetration pricing is Netflix. The streaming service hooks users with a one-month free subscription and allows them to watch any content on the platform. Users are more likely to continue paying for the forum once they become hooked on the many available series.
What are the Advantages of Penetration Pricing?
Done right, penetration pricing can be a boon for your business. It applies to all business types and is probably the fastest way to promote customer conversion. The pricing strategy:
- Helps establish brand recognition as a low-price provider.
- Generates high sales volume and allows a company to reduce its marginal cost.
- Increases goodwill by creating a bargain for customers and encouraging them to spread the word.
- Pushes you ahead of the competition and gives you extra leeway to acquire customers before the market has time to react.
- Increases the inventory turnover rate, making it profitable for all partners on the vertical supply chain.
What Are the Drawbacks of Penetration Pricing?
- Short-term losses.
- Customers may perceive lower quality from low prices.
- Does not work for long periods of time.
- Prices may drop to unsustainable levels.
How to Implement Penetration Pricing For Your Business?
Penetration pricing is the initial phase of a long-term strategy aimed at attracting, converting, and building relationships with new customers. For a penetration pricing strategy to work, you must:
- Avoid pricing wars with your competitors since they can badly damage your company's reputation if the battle does not work in your favor.
- Understand your business objectives and know when to sacrifice your short-term profits for long-term gains.
- Analyze if your financial situation is feasible enough to handle newly acquired customers.
- Implement gradual price changes. Sudden, unexpected changes in price will break your customers’ trust.
- Keep your customers engaged by cultivating meaningful and mutually beneficial, long-term relationships.
How to Know if Penetration Pricing is Right For Your Business
Penetration pricing may work to your advantage when there is:
- A demand for your product.
- Less differentiation in your product.
The strategy also works when your product is apt for big-level markets. However, this strategy requires proper planning and hardwork to establish your brand and regain the initial loss once you’ve penetrated the market.
Closing Points
Penetration pricing is all about luring customers away from your competitors with lower-priced products. Your success lies in how efficiently you manage long-term customer conversion and yield profit per customer.
