Across e-commerce marketplaces, it has become increasingly challenging for brands to stand out. Modern customers have countless options at their disposal, making it imperative for brands to differentiate themselves from competitors. Price, for instance, can be a highly effective tool to drive demand and influence user behavior. 83% [1] of consumers admit to comparing prices on various sites before making a final purchase decision.

Implementing the right pricing can help brands properly convey value, fulfill consumer needs, and ultimately drive profitability [2]. A powerful pricing strategy to consider is penetration pricing. Through this approach, brands can leverage pricing to disrupt market share and encourage users to try out their products.

In this article, you’ll learn:

• What penetration pricing is and why brands use it
• The strategic benefits and potential drawbacks of this pricing approach
• Real-world examples and best practices for successful execution
• How penetration pricing compares to price skimming
• The future outlook of this strategy in a competitive market

What is Penetration Pricing?

Penetration pricing refers to a strategy where a brand introduces a new product at a lower price than that of their competitors, to attract attention and rapidly capture market share. Through this strategy, brands can set themselves apart from competitors and gradually build a customer base. By undercutting competitor prices, companies can reach consumers who are budget conscious and sway them from higher-priced products.

Why Do Brands Use Penetration Pricing to Enter a Marketplace?

The penetration pricing approach is a strategic power play, empowering brands to shift market dynamics in their favor and actively overcome significant barriers to entry. Instead of passively waiting to be noticed, they use a rock-bottom price to force a reaction from both consumers and competitors.

The main objective here is to create a deal so good that even loyal customers feel like they have to switch from the products they’ve been using for years. This tactic works best in markets where consumers are highly price-sensitive and switching between products is easy (e.g., everyday household goods).

By pursuing quick, massive growth, a brand can go from an unknown to a serious competitor.

The Strategic Benefits of Penetration Pricing

For brands that plan to launch new products or simply stand out amongst competitors in the fast-growing e-commerce market, penetration pricing is a powerful tool to consider. From increased sales to better brand visibility, here are three key ways this pricing strategy could bring value to your business:

a. Rapid market share growth

Gaining a significant customer base quickly, particularly in a price-sensitive market, can set brands up for success. By starting at a low price point, brands can capitalize on this opportunity to overtake competitors and enhance credibility as a rising market leader.

b. Customer loyalty

Building brand loyalty by offering attractive prices initially – can lead to long-term profitability as prices normalize. Penetration pricing clears the path to brand loyalty, providing brands with the foundation to build relationships with new and existing customers.

c. Economies of scale

By utilizing the penetration pricing approach, brands can expect a higher volume of sales. Increased demand equates to heightened production, which can potentially reduce costs and allow for sustained competitive pricing.

Possible Cons of a Penetration Pricing Strategy

While the numerous benefits of penetration pricing may seem attractive, it’s important to also consider the potential drawbacks that come with it – such as increased competition and impacts on profitability. Below are some notable disadvantages of market penetration pricing to stay mindful of:

a. Profit margin impact

Penetration pricing calls for a larger upfront investment, making it a high-risk strategy. Initial low price points can result in thin profit margins, which may not be sustainable for the business in the long run.

b. Price expectations

While lower prices may attract a wider range of consumers, this may result in unrealistic pricing expectations further down the line. Brands may struggle to transition to higher prices in fear of losing out on customers.

c. Competitor reaction

Competitors may be pushed to start a price war in retaliation to the price penetration strategy. If they choose to cut their prices, your brand may be forced to go even lower or completely abandon this pricing tactic, which could harm the entire market.

d. Brand perception

As a rule of thumb, most consumers directly relate price to quality. Setting consistently low prices might lead to poor perceptions of product quality, ultimately damaging the brand’s reputation.

Examples of When to Implement Penetration Pricing

Now that you understand the pros and cons of penetration pricing, it’s critical to decide when and how your business should bring this strategy to life. E-commerce pricing is an art. With the approach, you can disrupt competitors, capture market share, and become a frontrunner in the e-commerce space. Top examples of penetration pricing include the following:

a. E-commerce launches

As a new e-commerce brand entering today’s oversaturated market, it’s vital to stand out amongst competitors. With the right price penetration strategy, the brand can immediately attract new customers with a low-priced product. This heightened visibility can help boost sales and establish brand presence, ultimately setting the stage for future business growth.

b. Seasonal promotions

Leading brands know that the holiday season can make or break their profitability for the year, which is why having a solid pricing plan is crucial during this hectic period. By adopting penetration pricing, brands can capture more customers and grow market share, weakening the competition’s hold on the market.

c. Entry in emerging markets

For brands that are planning to expand into an emerging market, lower prices may be key to attract budget-conscious consumers. In this case, penetration pricing can help brands tap into a broader consumer base to further drive sales. Over time, the brand establishes a strong foothold in the new market and builds stronger customer relationships.

d. Subscription models

When it comes to subscription-based services, brands have the option to entice prospective customers by initially offering a low-cost subscription to try out their service. As users grow accustomed to the offering and experience the benefits, they are more likely to continue even after the price increases. This solidifies a consistent revenue stream and strengthens brand loyalty.

Best Practices for Executing Penetration Pricing Successfully

A low price can get customers’ attention, but you need a smart strategy to maintain it. Consider following these best practices to ensure your temporary pricing move leads to long-term success:

1. Do your market research

Before setting a price, thoroughly research your target market and competitors. Assess the price points of similar products and determine how low you can go without devaluing your brand or incurring unsustainable losses.

2. Establish a clear goal

Define what you hope to achieve with penetration pricing. Is it to acquire a certain number of customers or drive out a competitor? A clear objective will guide your strategy and help you measure success.

3. Communicate product value

While a low price is the main draw, it’s crucial to communicate the value of your product beyond the price tag. Highlight its unique features, quality, and benefits to prevent customers from perceiving it as a “cheap” or low-quality alternative.

4. Plan your exit strategy

Penetration pricing is a temporary strategy. Have a clear plan for how and when you will gradually increase your prices. This might involve a phased approach or a “limited-time offer” model to manage customer expectations and prevent sticker shock.

5. Penetration Pricing vs. Skimming Pricing

While both penetration pricing and price skimming are strategies for new product launches, they are fundamentally opposite in their approach and goals. The main difference lies in their initial price point and the target market they aim to attract.

	Penetration pricing	Price skimming
Initial price	Low	High
Primary goal	Gain market share and build a customer base quickly	Maximize profits and recover R&D costs
Target audience	Price-sensitive customers	Early adopters and customers willing to pay a premium
Market condition	Highly competitive, price-sensitive market	Little competition, high demand
Brand perception	Accessible, affordable, and value-oriented	Innovative, high-quality, and exclusive
Best-suited products	Mass-market goods (food, household items, subscription services, etc.)	Innovative or luxury goods (tech gadgets, designer fashion, etc.)

Industries Where Penetration Pricing Works Best

So, where can a new brand afford to sell a product for less? While every brand wants to grow its customer base, penetration pricing is particularly effective in industries where consumers are open to switching brands and price is a major deciding factor. Here are a few examples:

• Consumer electronics: New brands launching headphones or smart speakers may use significantly lower prices than market leaders (like Sony or Apple) to encourage initial trials and reviews.
• Beauty and wellness: A startup skincare or makeup brand might introduce its first line of products at a fraction of the cost of premium brands. This strategy lowers the risk for first-time buyers and persuades customers to switch from their usual products.
• Consumer goods (FMCG): A new food or beverage brand might introduce its product at a much lower price than competitors to get shelf space and encourage initial purchase and trial.
• Retail: A new online retailer might offer significant discounts or free shipping for a limited time to attract its first wave of customers and build brand loyalty.

Future Outlook of Penetration Pricing in Competitive Markets

The future of penetration pricing is being transformed by technology, shifting to a high-tech strategy powered by data. According to PwC, AI and machine learning are “game-changers” for pricing, allowing brands to sift through vast amounts of information to find the optimal price point [3].

The next wave of penetration pricing is all about hyper-personalization. Brands will use AI to craft custom offers for a specific customer: the first-time buyer, the user in a new market, or the consumer most likely to switch from a competitor. This allows them to execute promotions with more precision, taking into account customer activity, purchase history, and other key factors.

Eventually, penetration pricing will become a more precise and effective strategy, adapting to individual customer behavior in real time.

Conclusion

While there are varying perceptions of penetration pricing, it remains a popular strategy to adopt for brands looking to swiftly gain a competitive edge in the market. This approach enables brands to gain rapid market share growth, disrupt competitors, and strengthen customer loyalty. However, it’s critical for brands to understand the disadvantages that come with this approach — from risky profit margins to imminent price wars and potential brand perception issues.

If your brand is looking to build a more robust pricing strategy, consider leveraging Anchanto Digital Shelf. Through Digital Shelf, your brand can enable real-time price monitoring of competitors and leverage that data to make informed pricing decisions. Over and above this, Digital Shelf allows brands to monitor their share of search, optimize inventory management and monitor unauthorized sellers.

FAQs

1. Is penetration pricing ethical?

Yes, penetration pricing is considered ethical. It’s a competitive business strategy that benefits consumers by offering a lower-priced option. The goal is to gain market share, not to mislead customers. As long as the company is transparent about the product’s value and any future price increases, it operates within ethical business practices.

2. When would a company use penetration pricing?

A company typically uses the penetration pricing strategy when entering a new, competitive market. It’s ideal for quickly gaining a large customer base, building brand awareness, and discouraging competitors from entering the market.

3. What types of products are most successful with penetration pricing?

It works best for mass-market products where price is a key factor, such as new foods, household goods, or subscription services (e.g., streaming or mobile apps). These products generally have low switching costs for customers and can benefit from economies of scale as sales volume increases.

4. How does penetration pricing work in e-commerce?

In e-commerce, it’s used to attract new customers with deep discounts or introductory offers. The online environment allows companies to track success and acquire customers quickly.

5. How long should a penetration pricing strategy last?

It’s a temporary strategy that should last just long enough to secure significant market share and build customer loyalty. Once these goals are met, brands can gradually raise prices to a sustainable level.

6. Can penetration pricing work for luxury products?

No, it is not suitable for luxury products. The high price of a luxury item is essential to its brand identity, signaling exclusivity and prestige. A low price would devalue the brand and confuse its target audience.

References –

[1] – Statista.com – Share of global shoppers who usually compare prices before buying online as of August 2022

[2] – Uk.indeed.com – Pricing strategies: what are they and their importance

[3] – Pwc.be – Artificial intelligence may be a game changer for pricing