August 5, 2020 Growing & Complex Businesses en_US What is penetration pricing? Learn how to increase sales and grow your business with a penetration pricing strategy by reading this guide from QuickBooks. https://quickbooks.intuit.com/cas/dam/IMAGE/A1jHKtp4S/Penetration-pricing_featured.jpg https://quickbooks.intuit.com/r/growing-complex-businesses/penetration-pricing/ What is Penetration Pricing? 2021 Definition, Examples & Advantages
Growing & Complex Businesses

What is Penetration Pricing? 2021 Definition, Examples & Advantages

By Dominic Vaiana August 5, 2020

Penetration pricing is used to acquire new customers by pricing a product or service significantly lower than a competitor. The goal of penetration pricing is to offer a discount up front in exchange for awareness, market share, and ultimately the customer’s willingness to spend more money in the future.

A recent example of using penetration pricing was the successful launch of Disney+, which was priced aggressively lower than rival streaming services including Netflix, Hulu, and YouTube TV. But penetration pricing isn’t just for multi-billion-dollar corporations; it’s used everywhere from ecommerce platforms to your local grocery store.

In this article, we’ll break down some examples of penetration pricing and explore whether it’s an advanced pricing strategy that your business could use to increase sales volume.

What is penetration pricing?

Penetration pricing is an acquisition strategy used by businesses to attract new customers by offering lower prices than their competitors. This strategy is commonly used when a new product or service needs to “penetrate” a competitive market, so the business entices customers with a better deal in hopes of retaining them over the long run.

By setting an initial price below a customer’s expectations, businesses can potentially convert more sales faster than trying to compete with established brands, products, or services using a similar price point. Then, after establishing your brand image and acquiring market share, a business consider price increases or upsell new products.

That’s enough theory for now. Let’s look at some real-life examples of penetration pricing.

Penetration pricing examples

Depending on where you shop, you probably encounter penetration pricing on a weekly or even daily basis. From big box retailers to the pizza shop down the street, businesses are willing to temporarily sacrifice profit margins in exchange for awareness and market share.

Let’s take a look at three penetration pricing examples in action, and what you can learn from them.

How Disney+ using penetration pricing to gain traction in the streaming industry

Market penetration in the streaming entertainment industry is a tough task. Established brands like Netflix and Hulu have massive, loyal followings and have years of experience under their belts. So, when Disney decided to launch its original streaming platform, Disney+, in 2019, it needed the right tactic to earn subscribers.

That’s where penetration pricing came in.

While Netflix charged $8.99/month for its basic plan and Hulu charged $11.99/month for its ad-free plan, Disney+ priced itself aggressively low out of the gate: $6.99/month with a free trial. The low initial price combined with an increasing demand for streaming content made the Disney+ initial offering one that entertainment junkies couldn’t refuse.

It’s still early, but Disney’s penetration pricing strategy seems to be paying off: The streaming service gained more than 50 million subscribers in less than a year.

Frito-Lay: Penetrating the potato chip market

For more than 30 years, Pringles (owned by Kellogg’s) were the only stackable potato chips available in grocery stores across America. But Frito-Lay wanted to change that. In August 2003, Frito-Lay launched Lay’s Stax: a brand of potato chip designed specifically to compete with Pringles. The shape, texture, and flavor were nearly identical–they even came in a tall, cylinder-shaped canister.

However, upon launch Stax were priced slightly cheaper than Pringles in certain markets.The Once shoppers tried enough Stax to realize they were on par with Pringles, Frito-Lay phased out their penetration pricing strategy. Nearly two decades later, Stax are still on supermarket shelves competing with Pringles.

The lesson?

A lower price point can get you a foot in the door to prove your product’s value and capture market share.

Sunny Co. Clothing: The pros and cons of a viral swimsuit giveaway

In the summer of 2017, two students at the University of Arizona came up with an idea to get attention for their swimwear line, Sunny Co Clothing, in a saturated marketplace: anybody who posted a picture of their classic red swimsuit (valued at $64.99) on Instagram would get a free one—just pay shipping.

Word of mouth propelled Sunny Co’s Instagram following from 7,000 to more than a quarter million overnight. More importantly, 346,000 orders came through. But there was a problem: the sudden surge in sales forced the brand to cap the offer at 50,000 swimsuits, which caused a backlash on social media. Nevertheless, Sunny Co emerged from the situation with thousands of new loyal followers and an infamous legacy.

There are two key takeaways from Sunny Co Clothing’s penetration pricing stunt:

  1. A free product (even for a limited time) can be the ticket for long-term awareness and sales.
  2. If you make a bold offer, you better be able to back it up.

Types of penetration pricing

You might have noticed a few variations on the same pricing strategy in the examples above. Let’s do a deeper dive into four common types of penetration pricing.

Low introductory price

Just as Frito-Lay did with Stax, you can offer a low introductory price for a new product or service as your “hook” to attract curious customers. Then, after you’ve generated enough awareness, you can raise the price to recoup any short term losses you may have incurred.

Buy one, get one free

Also known as BOGO, this is a common penetration pricing strategy to incentive consumers to engage with new entrants in a marketplace. For example, a new coffee shop might advertise a free small coffee with the purchase of $5 or more.

Free trials

If you want to capture consumers’ attention, using the word “free” can go a long way. Free trials are most relevant for subscription business models, such as Amazon Prime. The goal is to impress your customers so much that they’re willing to pay to continue what they signed up for. Many businesses that offer free trials require a credit card number to begin charging the standard payment once the designated trial period ends.

Freemium pricing

Freemium pricing is the practice of letting customers choose between a basic service for free and an enhanced service which costs money. With Spotify, for example, users can listen to music with ads for free or pay $9.99 per month for unlimited ad-free music. This strategy usually results in a large percentage of customers using a free version and a smaller percentage paying for an enhanced experience.

Penetration pricing vs. price skimming

Price skimming is another customer acquisition strategy that utilizes the opposite approach of penetration pricing. Rather than launching new products or services at a lower price to capture market share, price skimming involves charging the highest amount customers will pay to maximize profit margins.

This may sound counterintuitive, but it tends to work well for luxury products where high earners adopters are willing to pay extra to be early adopters. Apple, for example, charges consumers a high initial prices for the latest editions of iPhones because the brand has a steady foothold in the tech market and an incredibly loyal audience.

How to successfully implement penetration pricing

Penetration pricing might sound like an attractive option if you’re trying to make a splash in a crowded marketplace. But before you slash your prices or give anything away for free, you need a roadmap to implement this strategy effectively. Whether you’re selling snow cones or software, here are three important tips to keep in mind:

1. Make sure your market is price elastic

In order for a market penetration strategy to succeed, the market should be price elastic, which means that a decrease in price spurs demand. Some examples of elastic goods and services include entertainment, professional services, and technology while necessities like water and medicine tend to be less elastic.

2. Understand how much loss your business can absorb

You might be willing to sacrifice short-term profits in exchange for long-term awareness, but it’s crucial to know when to draw the line. Slashing prices and promoting giveaways can work wonders in terms of customer acquisition; however, if you don’t have enough reserve funds to manage those customers, the plan can quickly backfire. This is why it’s so important to understand cash flow.

3. Build customer loyalty early

Penetrating the market is only half the battle.

Once you’ve earned a customer base, you must engage with them and cultivate meaningful, mutually beneficial relationships. Only then will they be willing to pay and stay.

Advantages and disadvantages of penetration pricing

Just like any other important business decision, it’s important to determine whether the advantages of penetration pricing outweigh the risks. Here are some important factors to consider:

Advantages:

  1. Low prices can quickly attract a base of early adopters.
  2. Penetration pricing has the potential to generate high sales quantity, allowing you to realize economies of scale and lower your marginal cost.
  3. Launching a product or service at a low price can catch competitors off guard, allowing you to snag new customers before the market has time to react.

Disadvantages:

  1. Low prices may signal to customers that your product or service is of lower quality than competitors.
  2. Customers might switch back to a competitor if you raise your prices too much or too soon after your initial price.
  3. Penetration pricing can lead to a price war with competitors where prices drop to unsustainable levels.

Is penetration pricing right for you?

Trying to elbow your way into a crowded marketplace is a tough task. Even if you’re confident that your business can compete with established brands, you still need to give your audience an incentive to switch—and in some cases, that incentive is saving a few bucks.

If your market is price elastic and you have enough funds to sustain thinner margins, penetration pricing may be an ideal customer acquisition strategy. Just remember: you’ll need to work hard to establish brand loyalty and recoup lost revenue after you get your foot in the door.

With insightful planning and attention to details, a penetration pricing deal can be a mutually beneficial pricing strategy.

Learn how QuickBooks Enterprise can help your business boost revenue with advanced pricing.

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Dominic Vaiana is a writer and bibliophile based in St. Louis. In addition to writing for QuickBooks, Dominic has developed content and campaigns for global brands such as Mastercard, GoDaddy, and InVision. Read more