What is Penetration Pricing?
290 reads · Last updated: December 5, 2024
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. Penetration pricing examples include an online news website offering one month free for a subscription-based service or a bank offering a free checking account for six months.
Definition
Penetration pricing is a marketing strategy where a company sets a low price to attract customers to purchase a new product or service. This low price helps the new product or service penetrate the market and draw customers away from competitors. Market penetration pricing relies on a low-price strategy, initially using low prices to make a large number of customers aware of the new product. The goal of the price penetration strategy is to attract customers to try the new product and retain them as new customers after the price returns to normal levels, thereby establishing market share.
Origin
The penetration pricing strategy originated in the mid-20th century as market competition intensified, prompting companies to find new ways to quickly capture market share. This strategy is particularly common in the fast-moving consumer goods industry, where demand elasticity is high and consumers are sensitive to price changes.
Categories and Features
Penetration pricing is mainly divided into two categories: short-term penetration and long-term penetration. Short-term penetration is typically used to quickly attract customers and is suitable for the initial launch of new products. Long-term penetration is used to establish long-term market share and is suitable for highly competitive markets. Its features include a low-price strategy, rapid market capture, and high demand elasticity.
Case Studies
A typical example is Netflix, which often offers a one-month free trial when entering new markets. This strategy helps Netflix quickly attract a large number of users and convert them into paying customers after the trial period ends. Another example is Amazon's Prime membership service, initially attracting users with low prices or free trials, and then retaining them by offering premium services and unique membership benefits.
Common Issues
Common issues investors face when applying penetration pricing strategies include how to set the initial low price to avoid losses and how to maintain customer loyalty after prices return to normal. Misconceptions include the belief that a low-price strategy will permanently damage brand value, whereas successful penetration pricing can enhance brand value by increasing market share.
