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What is a Penetration Pricing Strategy
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Penetration Pricing Strategy

What is a Penetration Pricing Strategy

Definition of a Penetration Pricing Strategy

Sometimes referred to as the "land and expand" approach, penetration strategy is an approach used by companies (especially in SaaS) to penetrate or infiltrate a new market, or rapidly expand in their current market.

This means setting a very low initial price on a product in the short-term, with the goal of compensating in the longer-term by upselling or cross-selling the new customers they gain. 

Sometimes, companies with a new offering may use penetration pricing to garner a large market share of customers before any obvious competitors come into the arena. Then, they may hike their prices once they’ve established the market penetration they are after. 

Or, they may lower prices in the short term to steal customers from competitors if the demand for the product is elastic. 

Advantages and pitfalls of a penetration pricing strategy

Penetration pricing has a few advantages, but there are some important potential pitfalls to consider as well.

The first advantage of penetration pricing is attracting a quick influx of new customers who see the value of the product, and feel they’re getting a good deal. The hope is that these customers will grow loyal to the product or brand, and buy-in to any upsells or cross-selling. 

However, this is not a guarantee, and sometimes customers could remain a financial drain.  Therefore, penetration pricing is not recommended as a long-term pricing strategy for any business.

Penetration pricing also allows companies to gain a large majority of market share before their competitors can react. However, this too can backfire.

If a company uses penetration pricing, customers may begin to expect permanently low prices for that product or service. When prices increase, those customers may become dissatisfied and stop purchasing the product or service, or find another lower price competitor.

Factors to consider with penetration pricing 

Before considering a penetration pricing strategy, companies should weigh the importance of brand identity and brand loyalty with their customers. 

If brand identity is very important to your company’s success, penetration pricing may not be a good fit, as customers may perceive the brand as ‘cheap’ or low-quality.

If brand loyalty is strong with your customers, you may have higher success with penetration pricing, as your customers — once in the proverbial door — will continue to buy from you whether you upsell or raise your pricing (ultimately, the end goal of penetration pricing).

General FAQ

What is the purpose of a penetration pricing strategy?
The aim of a penetration pricing strategy is to attract buyers to a new product by selling it at a low rate during the initial offering. This can help to migrate users from competitors and allow the product to gain a foothold in the market. Hopefully, customers who purchase the product at the lower price will be satisfied enough to keep coming back when the cost inevitably increases.
Who should conduct a penetration pricing strategy?
Businesses may find penetration pricing strategies most effective when a new product is expected to be in high demand, but could easily be copied by competitors. However, it’s crucial that companies implementing penetration pricing have the stock to meet demand, or they risk disappointing customers and sending them away to competitors anyway. Generally, businesses with the financial stability to sell products at a lower cost and, potentially, reduced profit will benefit from penetration pricing. Smaller businesses may struggle to make it work.
What is the market penetration strategy?
A business puts a market penetration strategy into action to gain a greater market share than it currently enjoys, and winning custom from competitors. This strategy may involve multiple strands, such as pricing, distribution, or research and development.
What is the difference between market penetration strategy and pricing penetration strategy?
A market penetration strategy may involve increasing marketing investment to reach a wider audience, trying new distribution channels, or improving products. Penetration pricing may be a tactic used in this market penetration strategy, attracting new buyers and growing the audience.
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