What Is Penetration Pricing? Strategies and Best Practices

What Is Penetration Pricing? Strategies and Best Practices

Launching a new product can be a challenge. This pricing strategy helps you build buzz and attract customers.

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Launching a new product or service is not unlike catapulting yourself into a new career. You have talent and drive, but others have better connections or more experience. Yet you're confident and perhaps even willing to accept a sample project or lower salary to get your foot in the door.

Over time, you'll build your reputation and prove your worth.

Brands face a similar challenge: It's difficult to stand out and break into an established market as a newcomer. This is why many brands adopt a penetration pricing strategy to find their way into a (sometimes already crowded) space by offering lower pricing. With this strategy, brands intentionally set a price point lower than the product or service's actual value to encourage customers to give it a try.

What you'll learn:

• What is penetration pricing?
• Penetration pricing examples
• Alternatives to penetration pricing
• Benefits and pitfalls of penetration pricing
• How to get started with penetration pricing
• Analyzing penetration pricing performance

What is penetration pricing?

Penetration pricing helps a company quickly build market share by setting lower prices to attract customers. It is most effective when launching a new product in a highly competitive market - especially when the product has broad appeal and the company seeks to scale quickly.

Penetration pricing can create a buzz and make the product more accessible, driving word of mouth and accelerating adoption. By offering a lower price, companies can overcome initial resistance, encourage trial, and rapidly build a new customer base.

Penetration pricing examples

Here are a few examples of when penetration pricing is most applicable and most likely to be successful:

Early-stage startups

I once worked with a software as a service (SaaS) startup that launched a new project management tool. Initially, the company used penetration pricing to attract small businesses and freelancers, quickly gaining a user base and valuable feedback. As the product improved and gained traction, it adjusted its pricing to reflect the enhanced features and broader appeal, transitioning to a more premium pricing model.

Streaming services

Big-name streaming services often capture customers at a lower price point and then gradually raise their monthly subscription fees. Sometimes, these rate hikes hit the news, but as the streaming market grows increasingly competitive, companies must adjust accordingly. In each case, part of the value comes from the high-quality, original content that streaming companies produce - and the talent they attract for their unique content offerings.

Subscription-based services

Many retail-based subscription services use penetration pricing to enter the market. It's not uncommon for these brands to shift pricing and the content (or terms) of monthly offerings once they've built a customer base. Similarly, established cable and telecom providers sometimes use penetration pricing for new offerings or to entice customers with add-ons. This can look like a reduced price for multiple channels, phone lines, or internet access for a limited period of time, so a customer is more tempted to try the service or add-on.

Established companies offering a new product or breaking into a new market

Often, well-established brands attempt to play in a new space. Even with brand recognition, these companies may choose to employ penetration pricing at launch so their offer remains competitive among lower-priced options.

Here's an example: A well-known ridesharing giant first entered the market attempting to compete with taxis, whose end cost often depended on traffic patterns at any given moment. The company first disrupted the market by removing this uncertainty, but eventually cab fares and their prices were about the same. To maintain and grow its market share, the ridesharing company reduced its pricing for a limited time.

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Alternatives to penetration pricing

Product pricing strategies are pivotal in shaping a business's trajectory. It's important to consider a few different pricing strategy examples before making a decision.

Loss leader pricing

Penetration pricing is similar to loss leader pricing in that customers enjoy low prices while a product or company is fresh on the market. Loss leading is a strategy for selling a product or service at a loss to increase your customer base and can be considered predatory. In contrast, penetration pricing generally sets a price point for the products that covers the costs.

• When to use: When first entering the market, retailers sometimes use this strategy, especially if they can give away or sell a product initially low, but rely on sales for replacement parts or other related components. For example, a new razor may be priced low, but the blades or related shaving cream are priced more competitively.

Price skimming

This is when a company starts out with a higher price point (thanks to existing product demand) and then slowly lowers the price to improve its attractiveness and expand to more price-sensitive customers. In this way, you see some short-term profit and then longer-term sustainability. A potential downside of price skimming is that competitors can undercut your higher price point and make a dent in your market share.

• When to use: When a new product enters the market, ifyou have a customer base prone to early adoption and open to premium pricing. These customers may enjoy being the first to try or own a product, or this strategy may be a safe bet when you already have a list of customers waiting for the product's release.

Value-based pricing

Here, the price point isn't based on how much it costs to produce something or provide a service. Instead, the price is set according to what the business believes a customer is willing to pay. This pricing strategy works best for established brands that already have a reputation for quality. Brand reputation allows the company to price new products higher from the outset and then gauge customer response.

• When to use: Companies offering a well-made, differentiated or unique product may be able to use this pricing model - provided they've done research and have customer proof. Part of perceived value includes how customers look and feel, or may be perceived by others, when using the product or service. This can also be an option when selling replacement parts for a specific product.

Freemium pricing

In this case, companies offer a free or limited version of their product and charge for add-on features or services. The eventual goal is to upgrade the customer to a paid subscription and more enhanced version of the product. Many SaaS B2B startups offer free, stripped-down versions of software to allow for experimentation and use. As customers scale or become reliant on the tool, there is a strong case for upselling.

• When to use: If you have a product you can offer a basic version of, with limited customer service, then freemium pricing is a great option - which is why it's used widely by software companies. It's important to also have a more premium version of the product or service available that justifies the eventual cost. Startups often use this pricing model when they enter a market, but many companies offer free and paid versions of their products on an ongoing basis as a long-term customer acquisition strategy.

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Benefits and pitfalls of penetration pricing

Every pricing and marketing strategy has the capacity to impact revenue (good and bad). Let's discuss some of the potential benefits and pitfalls associated with penetration pricing.

Benefits

Penetration pricing is particularly effective for early startups and subscription services because it lowers the entry barrier for customers, encouraging them to try a product or service without a significant financial commitment. If you're confident in the quality and value of your offering, this strategy helps build a user base quickly and generate initial momentum.

Pitfalls

You will eventually need to raise prices and you risk losing customers once you do. Loyal customers may feel misled if they don't understand the exceptional value you're delivering or see how you're continuously enhancing the offering. Some potential customers may wonder about quality, as a low price can be associated with lower quality (so, balance affordability with a strong value proposition).

Lower pricing can also trigger competitors lowering their prices to compete, which creates a race to the bottom. It's important that businesses don't set unsustainably low prices to eliminate competition and instead think about how to differentiate beyond pricing.

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How to get started with penetration pricing

Implementing penetration pricing starts with thorough market research to identify target segments that are price-sensitive and likely to switch from competitors. Setting an initial competitive price involves understanding the lowest price point that covers costs while still being attractive to customers.

1. Identify target market segments

Conduct thorough market research to identify the segments most likely to respond positively to a lower price. Focus on early adopters and price-sensitive customers who can help generate word of mouth and initial traction.

Market research may involve quantitative research via surveys or questionnaires, or qualitative research through focus groups and interviews. A combination will provide data that you can analyze, as well as direct feedback about customer needs and wants. It's also a good idea to listen to what customers are saying on your social media channels and to look at the customers your competitors are targeting.

2. Set initial competitive prices

Set prices low enough to attract attention and encourage trial, but ensure they are sustainable in the short term. This means the price should cover the cost of goods and labor that go into the product or service so you're not operating at a loss from the get-go. The goal is to strike a balance between affordability and perceived value.

3. Adjust over time

Monitor market response and competition pricing and gather customer feedback to assess the effectiveness of the pricing strategy. As the customer base grows and the product gains recognition, slowly increase prices to improve profitability while maintaining customer loyalty.

Gradually increasing prices can - and should - be justified by adding new features, improving service quality, or offering additional benefits that enhance perceived value. Regularly reviewing your pricing strategy ensures it remains aligned with business objectives and market dynamics.

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Analyzing penetration pricing performance

To ensure penetration pricing is effective, focus on consistency, provide exceptional customer service, and prioritize continuous product improvements. Building a strong brand reputation and fostering customer loyalty can help sustain the momentum gained through setting initially low prices. Here's how to get started.

Key metrics for analyzing pricing performance

Sales software is integral to analyzing penetration pricing performance and impact. While the following is not an exhaustive list, you'll want to regularly review these key metrics:

• Sales growth: The sales volume or growth for a product or service is used to help calculate market share. You'll want to keep a close eye on sales volume during the period of penetration pricing to see whether it helps drive demand.
• Customer acquisition rate: Similarly, you'll want to measure how many net-new customers you're attracting while using this pricing strategy. If the goal is accelerated adoption, then the customer acquisition rate should be high.
• Customer retention and churn rates: Penetration pricing can attract customers driven by the price point, but less likely to remain loyal when the price rises. Typically, these customers haven't yet established any brand loyalty with you. So, retention rates show that you're building some brand loyalty or customer satisfaction. And high churn rates are strong indicators of whether you're offering (or communicating) enough value, or even whether you're attracting the right customers.
• Customer lifetime value: As you attract customers with penetration pricing, it's important to measure their value and contribution to profitability over time.
• Market share: You'll want to keep a close eye on the market to determine whether your market share, or market penetration, is expanding as a result of this pricing strategy.
• Profitability: Ensure any profit margins for the goods or services within your penetration pricing strategy are stable or improving. Profit should grow as you expand your customer base and market share, and as you test upselling or add-on opportunities.

Analysis tools

Many tools on the market are designed to enhance the effectiveness of pricing and go-to-market strategies. It's especially important today to prioritize tools that provide real-time insight into the metrics above so you can make timely, data-driven decisions without risking losing market share - especially if you're not meeting initial targets.

In my experience, a combination of just a few powerful and well-integrated tools can easily set you up for success.

1. An integrated platform for configuring, pricing, and quoting is instrumental for ensuring your pricing strategy is optimized for success. Tools like this help you respond quickly with an accurate quote or even to manage pricing dynamically, allowing you the flexibility to adjust prices based on market conditions and customer segments. These decisions may include fine-tuning the price point, making a case for enhanced product features, or refining your overall go-to-market strategies and value proposition.
2. For the one-two punch, sales analytics software built into your CRM provides deep insight into customer behavior and sales trends. Use this software to track key performance indicators and help determine pricing effectiveness. Sales analytics software is valuable for understanding and measuring how different pricing tiers affect new business, expansion, customer retention, and overall revenue - ensuring your pricing strategy aligns with business goals.
3. Additionally, sales software paired with a marketing cloud allows you to run targeted campaigns, or offer introductory prices to specific customer segments and track response rates. This data-driven approach ensures pricing strategies are continuously optimized for maximum impact.

Stay agile and iterate

It's always important to research pricing strategies before applying one - especially a price increase. Yet it's also important to "think on your feet." Staying responsive to market changes ensures a penetration pricing strategy, or any other, remains effective and aligned with business goals. Continuous iteration grounded in customer feedback is crucial for long-term success.

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Remove the guesswork

Sometimes, you need to create your own opportunity for exposure - and penetration pricing can help. While it may feel risky to enter the market at a low price, it's often worthwhile. But before applying this pricing strategy, consider whether the conditions are well-suited for your business and whether you have the right technology in place to measure and adjust pricing post-launch. It's vital to have tools in place to help gauge whether your penetration pricing strategy is effective.

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As an associate director and practice lead, Ritu Jhajharia works in senior leadership at Horizontal Digital. She leads the Salesforce Functional Consulting practice and plays a key role in the delivery of large enterprise projects to their clients in the MENA region. Prior to this, Ritu worked as... Read More the first-ever Head of Digital Marketing at Union Bank of India, one of the country's largest public sector banks. Ritu is a published author and contributes regularly to various platforms with her writing and speaking gigs. She was a national finalist at the "Economic Times Young Leader" initiative. She is also a 5x Salesforce Certified Consultant.