Penetration Pricing Definition
Penetration pricing is a business strategy in which a business sets a lower price for a new product or service during its initial phase in the market. The idea is to offer the product at a price lower than the competitors’ and capture a significant market share before competitors can react, thereby securing a sizable market portion.
What Is the Purpose of a Market Penetration Pricing Strategy?
The main goal of the penetration strategy is to capture a significant market share quickly. Companies aim to attract customers from their competitors and build loyalty by providing high-quality services or products at lower prices. This strategy allows them to raise prices while potentially maintaining customer satisfaction.
However, it’s not just about rapid user acquisition. Penetration pricing is also helpful during the initial and crucial phases of product development. When companies onboard more users quickly, they can get useful feedback to improve their platforms. This allows them to meet their users’ needs and expectations.
Many businesses employ penetration pricing, including retail, telecommunications, and even the food industry.
For example, Xiaomi, a Chinese electronics business, penetrated the markets with high-quality smartphones priced significantly lower than its competitors. As of Q4 2021, they controlled 12% of the worldwide smartphone market.
MORE: What is prestige pricing?
Penetration Pricing in the SaaS Industry
In the SaaS industry where competition is intense, standing out becomes vital for business owners. As a result, offering high-quality services at reasonable pricing can be the key to quickly building a loyal customer base.
According to a report by Blissfully, in 2020, businesses used an average of 137 SaaS applications, a 30% increase from the previous year. This boom highlights the importance of standing out and promptly grabbing market attention.
By implementing a penetration pricing strategy, new businesses can quickly onboard many users, get feedback, analyze, and define their market position.
Consider Slack and Dropbox. When they first began, they offered free basic versions of their software, which attracted many users.
As they accumulated value, many consumers upgraded to paid premium versions, increasing revenue. This is an excellent example of penetration pricing in action.
By initially setting a low (or even free) price point, these businesses could quickly build their market share by drawing users away from competitors.
MORE: What is bundle pricing?
The Psychology Behind Penetration Pricing
Low starting costs attract attention, eliciting a sense of value and cost-savings and giving consumers the impression that they are receiving a good deal.
When a high-quality product is supplied at a lower price than expected or when compared to rivals, it naturally piques buyers’ attention.
Additionally, penetration pricing is about more than just a reduced price; it is about establishing trust. Offering a product at a low cost allows customers to try it with little financial risk.
Customers are more inclined to continue using a product if they believe it is valuable, even if costs rise later. This early trust serves as the foundation for long-term consumer loyalty.
Spotify, for example, offers free music listening on its ad-supported platform. Because of the low entry barrier, it could collect a large user base.
As a result, many users will typically see the value of an ad-free experience and extra features, which leads to an upgrade to the platform’s premium paid edition.
MORE: What is charm pricing?
Penetration Pricing Examples
Netflix
When it originally entered the market, Netflix adopted a low-cost subscription strategy that drastically undercut established competitors. Its first offer of unlimited movie rentals for a cheap monthly subscription was groundbreaking.
The cheap price point quickly drew customers, allowing Netflix to dominate the DVD-by-mail market and, subsequently, the streaming arena.
Slack
Slack’s “freemium” concept was a changer in workplace communication platforms. Offering a viable free version drew teams and corporations from all over the world.
As businesses evolved and required more advanced services, several switched to Slack’s subscription tiers, generating considerable money.
Both Netflix and Slack used penetration pricing to grow their user bases rapidly. The plan was not only about pricing but also about providing excellent value.
Once people saw the value, the transition from free or low-cost to premium was natural.
MORE: What is odd-even pricing?
Advantages of Penetration Pricing
Rapid Market Entry and Significant Market Share
The fundamental attractiveness of penetration pricing is its potential to grab a significant portion of the market quickly.
Companies may quickly acquire a large user base by launching a product at a lower price than competitors.
For example, when Zoom joined the video conferencing industry, its freemium strategy helped it quickly gain a sizable user base, distinguishing it from current rivals.
Discourage Competitors
Penetration pricing is more than simply a marketing strategy; it’s also a defense strategy.
A low price may dissuade potential rivals from joining the market since they may find it difficult to provide comparable value without incurring losses.
Creating Viral and Word-of-Mouth Effects
Low costs, especially for high-quality items, may generate a lot of interest.
When customers discover an incredible offer, they are more inclined to share it with others, resulting in a viral impact. This organic marketing is crucial and may save businesses a lot of money on advertising.
Disadvantages of Penetration Pricing
Risk of Product or Brand Undervaluation
If not done appropriately, a low price may become synonymous with inferior quality in the consumer’s view.
To prevent this issue, it is critical to maintain the product’s quality and perceived worth.
Price Increase Struggle in the Future
When clients become acclimated to a given price, raising it might be difficult.
Companies must devise a well-thought-out strategy to raise pricing without triggering considerable consumer attrition.
Potential Backlash During Price Increases
Customers who joined because of low pricing may feel misled or abused if prices rise, even if they receive greater value. This can cause problems with public relations.
Financial Stress as a Result of Lower Initial Earnings
Companies must be financially robust since penetration pricing frequently implies sacrificing early profits.
They should be prepared to withstand the early time before reaping the long-term rewards of market domination.
Advantages and Disadvantages of Penetration Pricing at a Glance
| Advantages | Disadvantages |
|---|---|
| Rapid market entry and significant market share | Risk of product or brand undervaluation |
| Discourage competitors | Price increase struggle in the future |
| Creating viral and word-of-mouth effects | Potential backlash during price increases |
| Generates interest for high-quality, low-cost items | Financial stress as a result of lower initial earnings |
MORE: How do trial pricing strategies work?
Best Practices for Implementing Penetration Pricing
Understanding Market Dynamics and Competition
Before launching a low-priced product, examining the market landscape is critical. Who are your opponents? What are their pricing tiers? This foundation guarantees that your penetration price is appealing to clients and long-term for your business.
Setting a Timetable for Low Pricing
Penetration pricing should not be an ongoing process. Establish defined targets, such as reaching a specified market share, and a timetable for how long you will keep the initial low pricing.
Communication Techniques for Notifying Customers of Future Price Changes
Transparency is crucial. If prices will rise in the future, disclose this adjustment and explain why to help maintain your client’s trust. You can use emails, app notifications, and press releases to achieve this. Highlighting new value or additional features might help mitigate a price increase’s impact.
MORE: What is value-based pricing?
When Should You Use Penetration Pricing?
New Market Entry
If you’re launching a new SaaS solution into a market dominated by established players, penetration pricing might be your hidden weapon. You may easily attract attention and users away from the competition by giving a competitive pricing point.
Product Virality
A cheap initial pricing or freemium model can accelerate virality if your SaaS product benefits from network effects (each additional user adds value to all other users). Slack is a perfect example, with team members spontaneously inviting additional members, resulting in organic development.
Post Beta-Testing
If you are satisfied with your product’s value proposition and scalability, penetration pricing can aid in its widespread acceptance. It’s a method of rewarding early adopters while also expanding your user base.
MORE: What is a tiered pricing strategy?
Why You Might Consider Using Penetration Pricing
Rapid Market Share Acquisition
In the SaaS world, where user acquisition expenses can be high, penetration pricing offers a cost-effective way to establish a sizable user base swiftly. Once you’ve established an audience, you can consider upselling or moving subscribers to premium programs.
Creating a Firm Foundation for Growth
Obtaining an early majority might be critical for long-term sustainability. If you have a large user base, you’ll be better positioned to receive feedback, enhance your offering, and customize your product to market demands.
Increasing Brand Awareness
Penetration pricing may be an effective way to increase brand exposure. A competitive pricing point frequently sparks market discussions, enhancing reputation and awareness.
Penetration Pricing vs Price Skimming
| Factor | Penetration Pricing | Price Skimming |
|---|---|---|
| Objective | Rapid market capture by reaching a large customer base. | Maximize short-term profits by targeting early adopters willing to pay more. |
| Target Audience | Mass market, often price-sensitive customers. | Early adopters, niche segments, less price-sensitive customers. |
| Cons | Lower profit margins initially due to lower prices. | Can alienate potential customers who are price sensitive |
| Best for | Saturated markets, price-sensitive customers | Innovative or new products |
Key Takeaways
Penetration pricing is more than just setting a low price. It’s a planned decision driven by market research, consumer comprehension, and insight into future revenue patterns. This method may quickly push a company from obscurity to market recognition when done well.
However, firms must weigh the benefits and drawbacks. While the initial rush in client acquisition is tempting, you must consider the constraints of expanding revenues and preserving brand value at low price points.
It could be worth considering if you work in SaaS or a similarly competitive industry. However, remember that it’s not just about the price – it’s about giving exceptional value at that price point.
For more SaaS pricing information and tools visit our SaaS pricing site.
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