Penetration Pricing Strategy: Definition, Example, Pros, and Cons

What is penetration pricing?

In e-commerce, penetration pricing is a pricing strategy that is used by online retailers to attract customers and gain market share. This is typically done by setting a relatively low initial price for a product or service in order to make it more attractive to potential customers.

The goal is to attract a large number of customers quickly and build a strong customer base. Once a significant customer base has been established, the retailer can then raise the price to increase profitability. This strategy is often used by new e-commerce businesses or by businesses entering new markets.

Pros and Cons of Penetration Pricing Strategy

Pros of penetration pricing:

1. Attracts customers: Setting a low price can be an effective way to attract customers and gain market share.
2. Increases market share: By setting a low price, a business can quickly gain a larger market share and make it more difficult for competitors to enter the market.
3. Increases brand awareness: Low prices can generate buzz and increase brand awareness, which can help a business establish itself in the market.
4. Lower costs of customer acquisition: With low prices, a company can acquire more customers than if it had a higher price point; therefore, the costs per customer acquisition are lower.

Cons of penetration pricing:

1. Can lead to lower profit margins: Setting a low price can lead to lower profit margins, which can make it difficult for a business to sustain itself in the long term.
2. Can lead to price wars: If other businesses in the market also adopt a low-price strategy, it can lead to a price war, which can be detrimental to all businesses involved.
3. Can devalue the brand: Setting a low price can create a perception that the product is of low quality, which can devalue the brand in the eyes of consumers.
4. May not be feasible for all products: Some products or services may not be able to sustain low prices for long, especially if they are high-cost products.

Penetration Pricing Strategy v/s Price Skimming

Penetration pricing is a strategy in which a company sets a relatively low initial price for a product or service in order to attract customers and gain market share. The idea is that once the product or service gains a significant customer base, the company can then raise the price. This strategy is often used when introducing a new product or entering a new market.

Price skimming, on the other hand, is a pricing strategy in which a company sets a high initial price for a product or service, taking advantage of the fact that it is new and unique. The idea is that early adopters are willing to pay a premium for the product or service, and as the product or service becomes more widely available, the price can be lowered. This strategy is often used for products or services that are innovative or have a significant technological advantage over existing products.

In a nutshell, penetration pricing strategy aims to attract customers by setting a low price, and price skimming aims to extract maximum profit by setting a high price initially. The choice of strategy depends on the product, market, and the company's objectives.

Read More: Psychological pricing: Strategies, Advantages & Examples

Penetration Pricing Examples

1. Netflix: When Netflix first introduced its streaming service, it offered a low introductory price in order to attract customers and gain market share. As the company built a large subscriber base, it gradually increased the price of its service. This allowed Netflix to increase its revenue and profitability over time while still maintaining a large customer base.
2. Amazon Kindle: Amazon used a penetration pricing strategy when it first introduced its Kindle e-reader. The company set a low initial price for the device in order to attract customers and gain market share. As the Kindle became more popular, Amazon gradually raised the price. This helped the company to increase its profitability while still maintaining a large customer base.
3. Uber: When Uber first launched its service, it used penetration pricing to attract customers and gain market share. The company offered low prices for its rides in order to attract customers and build a large customer base. As the company grew, it gradually increased its prices in order to increase profitability.
4. Xiaomi: Xiaomi, a Chinese smartphone company, used a penetration pricing strategy to gain market share in India. The company introduced its smartphones with low prices and high-end features, which helped it to attract customers and gain market share in the highly competitive Indian smartphone market.
5. Walmart: Walmart used penetration pricing when it first entered the grocery delivery market. The company offered low prices on its grocery delivery service in order to attract customers and gain market share. As the service grew in popularity, Walmart gradually increased its prices in order to increase profitability.
6. Aldi: German discount supermarket chain Aldi has used penetration pricing to gain market share in several countries. By offering low prices on a limited selection of products, the company has been able to attract price-sensitive customers and gain market share in countries like the United Kingdom and United States.
   
7. Ryanair: Ryanair, the Irish low-cost airline, used penetration pricing to gain market share in Europe. By offering low prices on flights, the company was able to attract price-sensitive customers and gain market share in the highly competitive European airline market.
8. H&M: When fast fashion retailer H&M first entered the U.S. market, it used penetration pricing to attract customers and gain market share. By offering low prices on trendy clothing, the company was able to attract price-sensitive customers and gain market share in the highly competitive U.S. clothing market.
9. Spotify: Spotify, a music streaming service, used a penetration pricing strategy when it first launched. The company offered a low-priced, ad-supported version of its service in order to attract customers and gain market share. As the service grew in popularity, Spotify gradually increased its prices in order to increase profitability.
10. Dollar Shave Club: Dollar Shave Club, a subscription-based razor service, used penetration pricing when it first launched. The company offered low-priced razor blade subscriptions in order to attract customers and gain market share. As the service grew in popularity, Dollar Shave Club gradually increased its prices in order to increase profitability.
11. Groupon: Groupon, an e-commerce marketplace, used penetration pricing when it first launched by offering steep discounts on goods and services to attract customers and gain market share. As the company built a large customer base, it gradually decreased the discounts it offered.
12. Zoom: Zoom, a video conferencing service, used penetration pricing when it first launched by offering its service for free for a limited period of time in order to attract customers and gain market share. As the service grew in popularity, Zoom gradually introduced pricing plans for businesses and other customers.
13. Tesla: Tesla, an electric vehicle maker, used penetration pricing with its early models, such as the Roadster and Model S, to attract customers and gain market share in the luxury electric vehicle market. As the company's offerings expanded, it gradually increased the prices of its vehicles, reflecting the increased cost of production and the addition of new features.
14. Dollar General: Dollar General, a discount retail chain, used penetration pricing when it first opened its stores by offering a wide range of products at low prices in order to attract customers and gain market share in the discount retail market. As the company built a large customer base, it gradually increased the prices of its products to increase profitability.
15. Costco: Costco, a membership-based warehouse club, used penetration pricing when it first opened its stores by offering a wide range of products at low prices in order to attract customers and gain market share in the warehouse club market. As the company built a large customer base, it gradually increased the membership fee and the prices of its products to increase profitability.
16. Airbnb: Airbnb, a vacation rental platform, used penetration pricing when it first launched by offering low prices for rentals in order to attract customers and gain market share. As the company built a large customer base, it gradually increased the prices of its rentals, as well as adding additional features such as the "superhost" program, to increase profitability.
17. Alibaba: Alibaba, the Chinese e-commerce giant, used a penetration pricing strategy when it first launched by offering low prices for goods and services in order to attract customers and gain market share. As the company built a large customer base, it gradually increased the prices of its goods and services and introduced additional features such as the "VIP membership" program to increase profitability.
18. Ola Cabs, an Indian ride-hailing company, used penetration pricing when it first launched by offering low prices for rides in order to attract customers and gain market share. As the company built a large customer base, it gradually increased its prices to increase profitability and also introduced additional features such as the "Ola Prime" service.
19. Jio : Jio, an Indian telecom company, used penetration pricing when it first launched by offering low prices for its data and voice plans in order to attract customers and gain market share. As the company built a large customer base, it gradually increased its prices to increase profitability and also introduced additional features such as the "Jio Prime" service.
20. Zoomcar: Zoomcar, an Indian car rental company, used penetration pricing when it first launched by offering low prices for car rentals in order to attract customers and gain market share. As the company built a large customer base, it gradually increased its prices to increase profitability and also introduced additional features such as the "Zoomcar Prime" service.
21. Grammarly: Grammarly, a grammar and spelling checking tool, used a penetration pricing strategy when it first launched by offering a low-priced, basic version of its tool in order to attract customers and gain market share.