In a market dominated by consumer trust and brand loyalty, many individuals are hesitant to switch brands or try new products. The retail market has high barriers to entry due to intense competition and a demanding customer base. Retailers need to innovate to stand out and attract potential customers, converting them into loyal patrons.
Penetration pricing is a strategy that addresses this challenge. It involves offering a new product at a significant discount, often resulting in an initial loss for the merchant.
This strategy aims to attract customers to the new product or service and gain market share. The goal of penetration pricing is to build brand loyalty and encourage customers to appreciate the product, leading to increased willingness to pay more in the future.
Here are some examples of effective penetration pricing strategies. Adopting one of these approaches can lead to long-term profitability, even if it means incurring short-term losses.
What is Penetration Pricing?
Penetration pricing refers to a marketing strategy where a product or service is initially offered at a lower price to effectively compete within the industry.
This approach not only attracts new customers who value discounts but also enables the company to enhance its market presence. Following this phase, the company may choose to raise the price of the product or service or introduce a premium version at a higher price point.
Typically, penetration pricing strategies are aimed at achieving long-term goals such as strengthening the company’s position in the market and retaining a larger customer base who are more likely to remain loyal to the brand in the future.
Examples of Penetration Pricing
Here are 16 examples of penetration pricing strategies:
- Clothing retailers offering free accessories with purchases over a certain amount.
- Online creative content services providing free and paid versions of their offerings.
- Food manufacturers lowering prices for new products to compete with established brands.
- Video game companies offering free games with paid downloadable content.
- Wedding dress boutiques including free alteration services with high-value purchases.
- Online services giving free trials or extra features to attract subscribers.
- Beverage companies reducing prices temporarily to gain market share.
- Software providers offering free basic versions with paid upgrades.
- Automobile manufacturers lowering prices for new models or limited editions.
- Gym memberships with initial discounts or bonus services.
- Streaming platforms offering free trials with limited features.
- Electronics retailers bundling free accessories with high-value purchases.
- Airlines offering discounted fares during off-peak seasons or promotions.
- Cosmetic companies providing free samples or gifts with purchases.
- Mobile phone carriers offering discounted plans for new customers.
- Furniture stores giving discounts or free delivery for bulk purchases.
1. Netflix
Netflix is a prime example of successful penetration pricing. While there are frequent complaints about subscription prices increasing or the end of a one-month free trial, customers generally accept the higher costs due to the extensive and high-quality content available.
As a result, Netflix now holds 51% of streaming subscriptions in the United States, making it a market leader. Other OTT platforms are adopting similar penetration pricing strategies to attract new customers.
2. Grocery store
Grocery store chains often employ penetration pricing strategies to boost brand visibility by offering food products at discounted rates. This approach includes prioritizing popular or high-value items in pricing plans to drive sales.
Additionally, it can facilitate the promotion of new products and foster positive relationships between executives and food distribution partners.
For example, consider Brodington’s Market, a grocery store chain that introduces a membership service offering discounts on new or popular items.
To promote this service, Brodington’s executives offer organic fruits at a reduced price of $2.99 to customers signing up as new members during checkout. This strategy not only attracts new customers but also strengthens ties with organic fruit distributors, leading to increased customer loyalty and enhanced market presence for Brodington’s Market.
3. Banking
Banking institutions may employ a penetration pricing strategy when introducing new customers to options for opening checking or savings accounts. Given the similarity of services offered by banks, providing discounts or promotional offers can incentivize new customers to choose a particular service over competitors.
This strategy not only helps attract customers but also fosters positive relationships with them, potentially leading to long-term and multi-generational client loyalty.
For instance, consider Community Inc., a local bank competing with several national bank branches in the same area. After deliberation, its leadership decides to waive all fees typically associated with maintaining an active bank account for the first six months for new clients.
This reduced fee offer attracts more individuals seeking to open new accounts to Community Inc. In the following year, the bank experiences a 6% increase in its customer base, including clients referred from the national branches, showcasing the effectiveness of the penetration pricing strategy in expanding its clientele.
4. Airline Companies
Airline companies often utilize penetration pricing strategies to incentivize customers to choose their services over competitors, especially during peak travel seasons or events. This approach is particularly beneficial for smaller airlines looking to attract customers during high-demand periods, such as national holidays or school vacations. It also demonstrates a level of care for customers who may require additional assistance during these busy times.
For instance, consider Landlocked Airlines, a small airline offering air transport between areas within a single state. To attract more customers during the holiday season, Landlocked Airlines reduces prices across its services during winter. This promotional pricing not only helps the company gain a positive reputation in the industry but also attracts new customers who may opt for more expensive flights in the future. By effectively implementing penetration pricing, Landlocked Airlines successfully increases its customer base and establishes itself as a competitive player in the airline industry.
5. Internet Providers
Telecommunication providers, including TV and internet services, commonly employ penetration pricing strategies, much to the frustration of consumers facing sudden bill increases. Comcast/Xfinity, for instance, offers low initial prices, free premium channels, and easy upgrades.
Over five years, Comcast has grown its internet market share from 56% to 64%, primarily at the expense of phone companies.
Despite occasional price hikes, most customers stay, benefiting Comcast’s customer base significantly. Similar strategies are seen in landline services, often bundled with cable, internet, and smartphone packages to attract consumers.
6. Online Education Providers
Online education providers often employ penetration pricing strategies to boost the perceived value of their offerings and attract a larger number of returning students.
This approach allows students, their families, and educators to experience a program’s features on a trial basis, enabling them to make informed comparisons with other options available. Additionally, penetration pricing fosters trust between education service providers and their clientele.
For instance, consider Harding Academy, a new online education service offering supplemental lessons for elementary school students. To position the program as a leading educational resource, Harding Academy’s executives offer discounted website benefits to new partner schools.
This promotional strategy results in multiple schools partnering with Harding Academy for one semester, after which they opt to pay the annual fee to continue accessing the program’s amenities.
By effectively implementing penetration pricing, Harding Academy not only expands its partner base but also establishes long-term relationships with educational institutions, showcasing the success of this pricing strategy in the online education sector.
7. Smartphone Providers
Two major smartphone operating systems, Android and Apple, employ distinct pricing strategies. Android focuses on market penetration by offering phones at lower costs, particularly through Samsung, aiming to build brand loyalty and reach a broader consumer base.
Conversely, Apple follows a skimming strategy, pricing its products higher to target a smaller but affluent market segment.
Another penetration strategy in the smartphone industry involves providers offering cheap or free phones in exchange for long-term contracts. This strategy may seem attractive initially to consumers due to the low upfront cost but can lead to higher expenses over time.
8. Gillette
Gillette provides an example of successful penetration pricing in the fast-moving consumer goods (FMCG) sector. By initially offering razors for free or at lower prices compared to competitors, Gillette maintains its market leadership.
It compensates for the initial loss by selling razor blades, attachments, and accessories at premium prices, showcasing the effectiveness of disruptive pricing in brand differentiation and market penetration.
9. Food and Beverages
Numerous food and beverage companies utilize penetration pricing strategies to introduce new products to the market. Some offer free samples through event sponsorships, while supermarkets advertise low introductory prices for fresh items.
For instance, Costco and Kroger use penetration pricing for organic products, capitalizing on higher margins and economies of scale to boost demand and sales.
Starbucks, a premium coffee chain, employs penetration pricing by initially offering new and seasonal drinks at discounted prices. This strategy encourages consumers to try the products and, upon positive feedback, Starbucks reverts to regular prices.
10. Hospitality Services
Hospitality services, including hotel companies, often employ penetration pricing strategies to boost brand recognition and sales.
This strategy is particularly effective in attracting frequent travelers who may opt for the same service across different locations. Additionally, it enables companies to showcase their diverse offerings, such as restaurant facilities or conference spaces, to potential customers.
For instance, consider Diamond Lodging, a hotel company with multiple locations along a busy multistate freeway commonly used by travelers. To attract travelers to choose their hotels over competitors, Diamond Lodging advertises discounted rates for stays in their master suites for one night.
This promotional offer not only attracts travelers to their establishments but also leads to word-of-mouth referrals, contributing to a significant increase in revenue.
In this way, the penetration pricing strategy implemented by Diamond Lodging successfully drives sales growth and enhances brand visibility in the hospitality industry.
11. Product Manufacturers
Product manufacturers often leverage penetration pricing strategies to build a favorable reputation for new products, often through free trial periods or installation offers.
This approach not only enables sales representatives to cultivate positive relationships with new customers but also encourages referrals and reviews, potentially leading to increased brand visibility and sales. Moreover, penetration pricing can help minimize product returns and drive overall sales growth.
For example, consider Price Industries, a hardware manufacturer launching a new line of printers targeted at companies with office buildings. The company’s executives decide to offer the printers for free during a 60-day trial period, with customers only being charged for installation costs.
This promotional strategy attracts multiple companies to try the free trial, many of which subsequently opt to purchase the printer at its full retail price after experiencing its benefits.
Through effective penetration pricing, Price Industries successfully introduces its new product line to the market, generates positive customer feedback, and boosts sales within the targeted business segment.
12. Clothing Retailers
Clothing retailers employ penetration pricing by providing additional services or products to customers alongside their purchases, such as complimentary amenities, free items, or exclusive access to future promotions.
This strategy aims to foster a strong connection with customers and enhance brand recognition in the media. For instance, Marriage Styles, a wedding dress boutique, offers free accessories and an alteration service to customers spending $500 or more, resulting in positive reviews and increased revenue.
14. Food Manufacturers
Food manufacturers utilize penetration pricing strategies to generate interest in new products similar to established ones, enhancing their reputation within the industry. For instance, Pop Culture, a company selling carbonated beverages, competes with another company offering similar flavors.
To attract customers, Pop Culture sets the price of each soda can at $0.99 and launches promotional campaigns. This strategy enables them to increase the price to $1.99 the following year while maintaining a positive industry status.
15. Online creative content
In the realm of online creative content, services like Knit Knowledge adopt penetration pricing by offering both free and paid versions of their offerings.
By providing select content for free to attract interest and reserving premium content for subscribers at a monthly fee, Knit Knowledge successfully converts many free users into paying subscribers, thereby boosting sales and raising customer awareness.
16. Video Game
Video game companies frequently employ penetration pricing strategies, offering free products with paid features or initially pricing a game title at a reduced value before raising prices for additional content like downloadable content (DLCs).
This approach capitalizes on customers’ familiarity with the company, encouraging them to purchase more content.
For instance, Wild Globe Enterprises releases a popular game simulating suburban life. They offer the base game for free during a holiday sales event and later advertise additional paid content, available for purchase within the application.
This strategy not only expands their customer base but also boosts revenue as players are more likely to invest in additional content they find enjoyable and valuable.
