Penetration pricing is a marketing strategy used by businesses to attract customers to a new product or service. This strategy involves setting a low initial price, often lower than the eventual market price, to attract customers and gain market share. The goal is to encourage customers to try the product or service and to create word-of-mouth buzz.
Once the product or service has gained enough attention or market share, or the promotional period ends, the business can then raise the price. The initial low price helps the product or service “penetrate” the market quickly, hence the term “penetration pricing.”
This strategy is often used by new companies or for new products entering a market with established competitors. It can be an effective way to establish a customer base quickly, but it also carries the risk of a loss if the cost of the product or service exceeds the low price.
It’s important to note that the success of a penetration pricing strategy depends on the demand elasticity of the product or service and the business’s ability to scale. The strategy works best when the demand for the product or service is highly elastic, meaning customers are very price sensitive, and when the business can take advantage of economies of scale to maintain a profit at low prices.
Example of Penetration Pricing
Let’s consider the example of a new video streaming service that enters a market dominated by well-established competitors like Netflix and Hulu.
This new company, let’s call it “StreamFast”, wants to quickly attract a substantial user base and establish itself in the market. To do this, it decides to implement a penetration pricing strategy.
Initially, StreamFast sets its monthly subscription price at $4.99, which is significantly lower than the $12.99 and $8.99 offered by Netflix and Hulu respectively. The low price point entices many customers to try StreamFast, especially those who are price-sensitive and those who are curious about the new service.
As StreamFast gains more subscribers and its service becomes more popular, it gradually increases its price. After the first year, it raises the price to $6.99 per month, and after another six months, it raises it again to $8.99 per month. By this time, StreamFast has built a solid subscriber base, and even with the price increases, many customers decide to stick with the service because they have come to appreciate its unique content offerings.
So, through penetration pricing, StreamFast has been able to successfully penetrate the market, attract a large number of subscribers, and gradually increase its prices to a more sustainable level.