What is a penetration pricing strategy?
Definition Of A Penetration Pricing Strategy
The penetration pricing strategy, often known as the “land and grow” method, is a pricing strategy used by businesses (especially in the SaaS industry) to penetrate or infiltrate new markets or rapidly expand in existing markets by charging higher prices. It is the practice of setting a low initial price for a product to make up for it in the long run by upselling or cross-selling to newly gained customers.
Businesses use penetration pricing to introduce a low price for a new product or service. The low initial price forces competitors to match the offer or quickly implement different techniques. Customers of competitors may migrate to the cheaper offer, and new customers may join as well. Following a time of expansion, the company often raises prices to boost profits and reflect the increased value of the product. The aim is that the higher sales volume will compensate for the lower cost.
Pros And Cons Of Using A Penetration Pricing Strategy
There are various benefits to using penetration pricing, but some substantial potential negatives to consider.
● The rapid influx of new customers who see the product’s value and believe they are getting a good deal.
● Customer contentment cannot be assured, and in some situations, customers may continue to be a financial drain. As a result, any corporation should avoid using penetration pricing as a long-term pricing strategy.
● Companies can also get a significant part of the market before competitors react to their pricing strategy.
● If a company uses penetration pricing to acquire new consumers, people may expect consistently low prices for a product or service. People may grow dissatisfied with rising costs and stop buying the product or service or switch to a lower-cost competitor who offers a better deal.
There are various aspects to consider when it comes to penetration price. When companies consider implementing a penetration pricing strategy, they should evaluate their customers’ thoughts on the importance of brand recognition and loyalty. If your company’s brand identity is critical to its success, penetration pricing may not be the best option because purchasers may see your brand as “cheap” or “low-quality.” If you have loyal customers, you may have more success with penetration pricing because they will continue to buy whether you upsell or raise your prices.
Examples Of A Penetration Pricing Strategy
Penetration pricing is a popular strategy in the business-to-consumer (B2C) market. Without a strong acquisition strategy, it isn’t easy to get a foothold in a new market due to the competitive nature of these items and the vast amount of options available to most consumers. Some of the examples of a successful penetration pricing strategy are:
● Netflix is an excellent example of a company that has successfully implemented the penetration pricing approach. Netflix entered a market that was dominated by DVD rentals. Netflix began offering a $15.95 four-DVD rental subscription in 1999. That’s less than a dollar per DVD, compared to $4.99 for a three-day rental period at Blockbuster.
● Disney+: One of the most challenging markets for new businesses to get into is streaming entertainment. Netflix and Hulu, for example, have strong brand recognition and a committed consumer base. As a result, when Disney+ chose to create its streaming platform at the end of 2019, penetration price was the best option.
● Gillette: When it comes to an excellent penetration price plan, one name that comes to mind is Gillette. Gillette makes up for the damage done by lost income by selling razor blades, attachments, and accessories at a higher price. This is an efficient way to create a Point of Differentiation (POD) from your competitors, especially in the Fast Moving Consumer Goods (FMCG).
