Companies introduce new products to the market every now and then. Often, the launch comes with a well-known strategy called penetration pricing. Even the streaming giant, Disney+, used it when the platform debuted a few years ago. What makes this approach work? How can you put it to use in your next product launch?


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The problem is, though, penetration pricing may appear simple, but it requires extensive market knowledge and a marketing approach to be effective. If done incorrectly, customers may become dissatisfied and cease purchasing the product or service, rendering all efforts leading up to the product launch futile.


In this series of articles, we will discuss why businesses should use a penetration pricing strategy for their product launch. We also recommend ways on how they can further maximise its benefits. We argue that despite some risks and challenges, proper execution of penetration pricing allows businesses to enter into markets efficiently.


At Taylor Wells, we believe that pricing influences how customers perceive the value you offer, thus, has a significant impact on how profitable product launches are. By the end, you will learn how to maximise the potential of penetration pricing to guarantee the success of your product launch.


Table of Contents:

I. What Is Penetration Pricing Strategy For Different Businesses

II. Penetration Pricing Strategy: How Lowering Prices Can Bring Big Gains

III. Importance Of Long-Term Market Penetration And Pricing Strategy For A New Product 



what is penetration pricing strategy

What Is Penetration Pricing Strategy For Different Businesses


Companies use pricing strategies ranging from penetration pricing to price skimming and value-based pricing to gain a significant market share while also making profits.


What is penetration pricing strategy?


Penetration pricing or a penetration price is also a marketing strategy in which a company lowers the entry price of its new products or services in order to attract customers away from competitors, with the intention of raising the price to the standard marketing price after gaining some customers.


Penetration pricing strategy is mainly based on the premise that customers will like your product or service when it is initially offered at a lower price and will continue to use it even after the price is raised to its usual market price. Furthermore, businesses may use penetration pricing strategies to dominate the industry by driving competitors out of the market, allowing them to control and influence the whole market share. That is, once the prices of the goods are reduced, they become the defining factor of the market price.


How are different businesses using penetration pricing strategy?


1. Free Trial


A free trial is among the most common method of introducing a new product to the market. This is becoming increasingly popular among SaaS companies. A great example was when Netflix offered its subscribers a 30-day free trial. What’s more, the major streaming service also had previously let users watch the first episode of a series for free. Netflix appears to have ceased these strategies only after reaching its target market share.


2. Low Prices


Disney+ attracted its first customers by offering lower prices than its competitors through penetration pricing. When Disney+ first launched, Netflix charged $8.99 per month for its basic plan, while Hulu charged $11.99 per month for its ad-free plan. On the other hand, Disney+ was initially priced relatively low at $6.99 per month, which includes a free trial. The launch of Disney+ was a success. In fact, in its first 24 hours, the platform had 10 million subscribers.


3. Gift Cards and Vouchers


Giving away gift cards and vouchers as incentives to your customers can boost the appeal of a product that they are unfamiliar with. For instance, is a luxury fashion retailer based in Düsseldorf, Germany, selling designer clothing online. They have initiated a spring campaign in which they are offering a $50 gift card to the new spring designer collection. Vouchers and gift cards are other examples of product-promotional campaigns that can be used to promote new product launches, catalogues, or remaining stock.


4. Complimentary Offer


Free delivery is one of the most common examples of a complimentary offer. Why? Because it is a favourite among clients. 47% of shoppers said they would dismiss a purchase if they arrived at the checkout and discovered that free shipping was not included. Hence, including delivery costs in your overall price of a new product will persuade your customers to buy it even more. Various eCommerce platforms, most notably Amazon, do this. Free shipping on new products only can also help to mitigate the negative impact free delivery may have on your gross profits.



What are the advantages of the penetration pricing strategy? 


  • Gaining new customers for your products or services.
  • It can raise the marketing share and value of your company and products.
  • It could be used as a marketing testing strategy.
  • Increased demand can lower production costs, increasing profit.
  • Can drive away competitors from the market.


What are the disadvantages of the penetration pricing strategy? 


  • Customers may switch to your competitor once you increase your price.
  • Brand image may be compromised.
  • The profit margin may be relatively low for a longer duration.
  • Competitors may also lower their prices.
  • Not profitable for a long-term pricing strategy.
  • Customer satisfaction is not guaranteed.


Discussion On Why Businesses Should Use Penetration Pricing Strategy


Despite the disadvantages and risk that comes with penetration pricing, businesses can still benefit greatly from using this strategy.


Why should businesses use a penetration pricing strategy?


Aside from Disney+, which we already discussed, several other companies have had success with their product launch due to penetration pricing.


One good illustration is the popular premium coffee chain, Starbucks. Frequently, the company brings new and seasonal coffees and drinks at a lower price point to incentivise consumers who try these new items. When customers become familiar with these offerings on the menu and demonstrate a favourable response, Starbucks withdraws the penetration pricing and proceeds with selling them at their regular prices.


Gillette is another company that is commonly thought of when discussing a successful penetration pricing strategy. For years, it has been able to maintain its market leadership by giving free razors or pricing them lower than competitors. The profits Gillette loses, it gains from razor blades, attachments, and accessories that are priced at a high price.



How can businesses maximise the benefits of penetration pricing strategy?


1. Utilise data.


Data helps businesses predict trends, identify opportunities, and stay ahead of the competition by providing insights into customer behaviour or market conditions even before they take place. Data is essential for a company’s growth and success. Rather than relying on gut feelings, managers must make informed decisions based on verified information, especially when introducing and pricing a new product or service.


2. Perform market trials if necessary.


Market research and trials assist you in better understanding your customers’ needs as well as how your competitors are performing. The insights gained from market trials should help you make important decisions about your penetration pricing strategy. Research can help you concentrate better on your marketing initiatives, make sound business decisions, and capitalise on opportunities. It is critical to include market research in your business strategy and operational processes.


3. Build commercial capability.


Our findings show that when a business builds and embeds commercial capability across the business; bolstering its internal pricing skills and capabilities to build a sustainable pricing system, it can generate at least 3-10% additional margin each year while protecting hard-earned revenue and volume. This is at least a 30-60% profit improvement straight to the bottom line.


4. Establish a pricing team.


Our findings show that with the right set-up and pricing team in place, incremental earnings gains can begin to occur in less than 12 weeks. After 6 months, the team can capture at least 1.0-3.25% more margin using better price management processes. After 9-12 months, businesses often generate between 7-11% additional margin each year. As they identify more complex and previously unrealised opportunities, efficiencies, and risks.



Implications Of The Advantages And Disadvantages Of Penetration Pricing


Here are things companies and their pricing teams can do to build commercial capability and ensure the success of their penetration pricing strategy: 


1. Learn about the financial strength of your company.


Understanding your company’s financial strength is essential because only then will you know how your business generates revenue and make investments. These are critical when launching new products and determining their prices. Managers typically assess their company’s financial strength using a diverse set of key figures. Total assets, operating costs, profit, and equity ratios are the most common indicators.


2. Examine your production costs.


The next step for any company that wants to use the penetration pricing strategy is to examine its production costs. For example, if you manage in the manufacturing industry, you must know how much each product costs. Your spending must be at the right level to be profitable even if you are trying to introduce a low initial price. On the other hand, if you are operating at a temporary loss or a low gain, then you may want to rethink your pricing or the launch itself.


3. Calculate the right introductory price.


Following a thorough examination of your production costs, the next step is to determine your introductory price. A low entry price will effectually penetrate the market, but take note that you also risk presenting your product as a low-quality good or service. Customers may perceive lower-priced products as being of lower quality. Thus, you must see to it that your introductory price is not too low. Nevertheless, it should not be so high that customers will consider the price difference to be easy to switch to your competition.


4. Pick a good time phrase.


A penetration pricing strategy is only effective for a limited time. You must determine how long the introductory price will remain in effect. You can determine the percentage of market share you want to capture before implementing the original market price. Alternatively, use the penetration pricing strategy to set a time frame of months or years.


5. Keep an eye on your competitors.


Although it is a wise decision to enter the market at a lower initial price, you should be aware that your competitors are also wise. They, too, are businesses looking for ways to increase their market share. For example, we can recall Pepsi and Coke lowering the price of their soft drinks years ago in order to drive Biggi drinks out of the market. Currently, the two major manufacturers of carbonated beverages sell at their standard prices.


6. Monitor customer behaviours.


Businesses must exercise extreme caution and closely monitor their customers’ behaviour before increasing their product price when their penetration pricing time frame ends. A “mirror penetration pricing strategy” is employed by some enterprises. This is when a product’s size is diminished by a small proportion. assess customer reactions before raising the original market price. For example, Pepsi and Coke used this tactic when they reduced the size of their drink bottle without raising the price.


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In this article, we discussed and evaluated penetration pricing strategy for new product launches and provides numerous real-life case study examples. Although penetration pricing can gain fast results (with data and a good pricing team backing); remember that this is a poor long-term pricing strategy. Furthermore, not all businesses that have implemented it have achieved genuine customer loyalty, putting the brand image and cash flow at risk. Despite these disadvantages, we believe that the penetration pricing strategy is an excellent way to launch a new product when used properly. It has been demonstrated that increasing marketing share and value can result in increased profit.


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what is penetration pricing strategy

Penetration Pricing Strategy: How Lowering Prices Can Bring Big Gains


Businesses generally have the same goal of wanting to reach as many people as possible. Once they do this, they have to figure out how to turn them into customers. For this entire process to happen, companies have to come up with a game plan – in other words, a marketing strategy. Many different marketing strategies suit different businesses. In this article, we’ll be discussing one in particular – the penetration pricing strategy. We’ll also answer what is skimming and penetration pricing and their differences. Read on to find out if this could be the answer your business is looking for!


What Is A Penetration Pricing Strategy?


In this article, we’ll cover the meaning of penetration pricing and its implications and benefits. A penetration pricing strategy relies on offering potential customers a much lower initial price to attract them to a new product or service. This marketing strategy is meant to steer buyers away from competitors. With attractive pricing, customers are introduced to your business and are then enticed to continue purchasing from you in the future. 


Common examples of companies that use penetration pricing are those that offer a one-month free trial of a web subscription, or a special discount for your first few purchases. Banks also commonly do this by offering you a six-month free checking account.


Skimming Strategy


A good example of a strategy that contrasts penetration pricing is a strategy called skimming. Where penetration pricing advertises new products with low to nearly nonexistent margins, skimming advertises new, innovative, or luxury products with high margins. This is because these products are usually early adopters that have less price sensitivity, or have customers who are willing to pay higher prices. 


Using A Penetration Pricing Strategy Successfully


When a business uses a market penetration pricing strategy correctly, it can lead to higher amounts of sales and an increased market share volume. The key is to find out how to successfully keep new customers. It’s easy to make a mistake using this strategy. For example; prices rise too high after the initial discounted or free period, so customers become inclined to switch to another competitor brand. A penetration pricing strategy tends to be most effective when the transition from the initial period is clear and not too jarring. Your offering must be worth the sustained subscription or repeat purchase. 


Another key is to constantly aim to maximise household reach. Rather than marketing to those that seem like your current loyal customers, look to branch out across multiple channels. 



Penetration Pricing Strategy – Pricing Up Vs. Down


One concern many businesses have when it comes to pricing strategies is whether to price up or down. Pricing down may seem like the way to go to increase reach. However, research shows that pricing up alongside an innovative product and well-thought-out marketing boosts investments and reach. Other businesses will also have a harder time competing against innovation, and won’t be able to simply lower prices to entice customers. Likewise, customers tend to be willing to switch to brands with higher prices if the product is significantly better.


Pricing Architecture – When To Limit A Product Range


When building a pricing structure, the main goal is usually to figure out how to boost penetration. However, boosting reach will be difficult if there are simply too many products in similar categories and price ranges. It’s important to assess when competition is just too high.


In these scenarios, companies can decide to tap into underserved markets instead. This can be as simple and creative as introducing different sizes of products. Small innovations can help you redesign a pricing architecture that will enable growth and profit. 



Effective Pricing Using A Penetration Pricing Strategy


Once you’ve settled on penetration pricing as your strategy, you’ll need to make sure your price point is aligned with your product. Depending on the industry you are in, you’ll want to adjust your pricing structure accordingly. This includes factors like whether or not you have an innovative advantage or are in a highly competitive market. However, these are all subject to your unique situation.


Understanding your business’ needs can give you clarity on what changes you need to make. Your business may have the need for flexible packaging, higher promotional spending, or a fast product turnaround. All of these will affect your strategy. 


Integrating Teams


Since the ultimate goal is to reach new households, pricing a product properly is essential to capturing a new customer’s interest. Effective pricing teams can help you do this, but every department needs to be unified in the right direction. 





Your sales team should have the same goal and not be misdirected into prioritising shares. This can be done in three ways:


  • Determine what the essential activities are that can help bring in new households. This can range from optimising and editing your product range, to boosting visual merchandising and social media.
  • Ensure that retailers maintain your preferred pricing within their stores. Some retail partners may increase prices to fit their margins, but this may deter customers from buying your products.
  • Optimise your portfolio of retail partners. It may be tempting to have as many as possible, but it’s best to choose the ones that fit your criteria and will serve your needs the most.


Integrating Marketing and Finance


Marketing and finance teams need to be just as integrated as any other department. Your marketing team will enable customers to see and hear about your product first. This is where your penetration pricing strategy will be carried out. Finance teams should be working in tandem with the others to help understand the effects and financial analytics of your strategies. Transparency and cross-functional collaboration make for more effective decision making.


Global Pricing Teams


Many companies don’t give them much importance, but hiring effective pricing teams can save a business from a number of downfalls. This includes pricing misalignment and underutilised analytics and insights. Pricing teams are well versed in strategies, research, and the importance of pricing correctly. Having an effective pricing team work closely alongside other departments can make all the difference when it comes to long term growth and expansion. 


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Pricing penetration can be incredibly important to growth, especially in building big brands. Decades of observation show this strategy works, and adopters of this strategy tend to outperform others. However, this strategy is only successful with effective teams that carry out your businesses vision in the best way possible.


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Importance Of Long-Term Market Penetration And Pricing Strategy For A New Product 🪅


Some people buy a product simply because the thought of owning it excites them, makes them feel better, or gives them a sense of being on-trend. The rise of digital platforms such as social media has given birth to new kinds of market penetration and pricing strategy. In fact, creating hype to enter a market has become more common than ever.


The problem is though, many marketing teams forget that hype is not a long-term way to create demand and to keep driving up sales. In most cases, hype dies just a few months. In worst cases, consumers lost interest and the product may already have bad reputation due to unmet expectations. The company starts losing profits and struggles to bounce back.  


In this article, we are going to discuss hype creation strategy as a means to achieve and increase market penetration pricing development. We present a case study about the hyped-up Prime energy drink’s launch. We argue that hype creation may be an effective market penetration strategy but it is not sustainable and may even harm the brand in the long term.


At Taylor Wells, we believe that businesses must think of long-term consequences when developing market penetration strategies. By the end, you will know how hype and clout can impact a product launch’s success and if it is a good choice for your business.


Should You Rely On Hype Marketing Strategy To Increase Market Penetration And Pricing Power?


Introducing a new product to the market can be daunting for businesses. It requires careful strategy and planning. A successful launch requires extensive research into the target audience, competitors, and marketplace trends to identify an appropriate product concept, pricing structure, and distribution model. Additionally, it is important to develop effective marketing campaigns with messages that will resonate with the target audience, and are tailored to reflect their needs.


As digital platforms became more popular, hype strategy became one of the most effective ways to achieve market penetration pricing development. Hype involves generating excitement and interest in a product or service by creating an aura of exclusivity, rarity, or desirability around it. This can be done through various methods such as launching promotional campaigns, utilising influencers, leveraging social media platforms, and more.


Hype can also be used to create a sense of urgency and encourage people to act quickly in order to get the most out of an opportunity. Using hype as part of a promotional strategy is a great way to attract attention, build buzz, and ultimately drive sales.



Discussion On The Advantages And Disadvantages Of Hype Strategy In Achieving Market Penetration And Pricing Power


Heard of the drink Prime? Well, all the ‘cool’ kids in town are drinking it and spending their parents buying it to get hold of it to brag to their friends – no matter the cost! 


Social media influencers Logan Paul, a wrestler, and KSI, a boxer, have teamed up to create their hyped-up energy drink called Prime. A marketing masterplan, along with the backing of a Premier League football club, has given the product high demand. 


How did the product launch go?


Some sellers are allegedly charging more than ten times the retail price. A 500ml bottle of Prime costs £1.99 in the UK, with a 12-pack going for £24.99. Individual bottles cost $1.88 in the United States. However, there have been numerous reports of that price being inflated. For example, in a tweet, KSI expressed his frustration by sharing screenshots of bottles sold for £15 on eBay. We have also seen some Australian online retailers selling one can starting at $15 and 12-pack for almost $150.


According to some reports, Prime is being sold for £100 per bottle at a Wakefield off-licence. Whether people are buying Prime drinks for £100 a bottle genuinely or the reports are just marketing ploys, it is true that some stores have been selling Prime at inflated prices.


KSI and Paul said that they are working hard to increase supply as much as possible to combat black-market selling. They even claimed that all of Prime’s profits are reinvested back into the company to increase supply.


Because of the high demand, some stores have already set limits on how many bottles a customer can purchase. Sainsbury’s in the UK, for example, is now selling Prime drinks, with a limit of three bottles per customer. Convenience stores in Australia are keeping their drinks in the store room and waiting for customers to ask them for bottles to ensure they are getting high prices for each unit purchased. 



Prime energy drinks demonstrate that effective marketing and influence can significantly increase demand and generate pricing power. However, such market penetration and pricing strategy is not sustainable and may even harm the brand when the hype wears off and people complain about overpricing. 


Hype often creates unrealistic expectations which can lead to disappointment and lost customers. It is important to focus on delivering quality products or services that will meet the needs of the customer, rather than relying on exaggerated claims. This helps ensure that customers feel their purchase was worthwhile and keeps them coming back for more.


Additionally, when a company over-promises and under-delivers, they may receive negative press or bad reviews that can have a lasting impact on their brand. In short, it is best to avoid hype in marketing and strive for more honest, realistic approaches. This helps ensure customers are getting what was promised and remain satisfied with their purchase.



Implications Of Hype Strategy In Achieving Market Penetration And Pricing Development


How can companies achieve a long-term market penetration and pricing development strategy? By not relying solely on hype, companies can make efforts to strategies how to build long-term relationships with their customers and maintain a positive reputation. Build a pricing team and strengthen your commercial capability.


Our findings show that when a business builds and embeds commercial capability across the business; bolstering its internal pricing skills and capabilities to build a sustainable pricing system, it can generate at least 3-10% additional margin each year while protecting hard-earned revenue and volume. This is at least a 30-60% profit improvement straight to the bottom line.


Our findings also show that with the right set-up and pricing team in place, incremental earnings gains can begin to occur in less than 12 weeks. After 6 months, the team can capture at least 1.0-3.25% more margin using better price management processes. After 9-12 months, businesses often generate between 7-11% additional margin each year as they identify more complex and previously unrealised opportunities, efficiencies, and risks.


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Bottom Line


Businesses must be careful when utilising hype marketing strategy to increase market penetration and pricing development. Hype can be a powerful tool in raising awareness of a product, but it can also backfire if used too excessively or without good reason. Therefore, hype should be used judiciously and with the goal of highlighting a product’s unique qualities in an honest and open manner. In this way, businesses can maximise the impact of hype while avoiding potential pitfalls that could lead to negative consequences.


It is still preferable to develop long-term marketing and pricing strategies rather than rely on momentary factors such as hype and clout. Long-term strategies allow businesses to create a consistent presence in the marketplace and foster better relationships with their customers, which leads to increased loyalty and retention.


For a comprehensive view on maximising growth in your company, Download a complimentary whitepaper on How to Improve Product Pricing.


Are you a business in need of help to align your pricing strategy, people and operations to deliver an immediate impact on profit?

If so, please call (+61) 2 9000 1115.

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what is penetration pricing strategy