Penetration pricing strategy is widespread in the market. Penetration pricing involves setting prices low for a period of time to attract customers. Once penetration pricing has attracted enough customers, companies will soon begin to increase the price, however the penetration pricing strategy often ensures that once customers are hooked on a product or service they will remain loyal due to the price change.
One example of penetration pricing strategies was found when Netflix began by offering one day rentals for $4.99, however after receiving large amounts of customer interest they raised their monthly fee from $17.99 to $19.99 overnight (Smith & Varian 396). This meant that if users wanted longer than one day rental there would be an extra cost involved which could discourage some consumers away from using this service because it is too expensive. However, this penetration pricing strategy has proved successful due to the fact that Netflix’s membership grew by over 24 percent (Smith & Varian 396).
An example of penetration pricing strategies was found when Nintendo Wii came out in 2006 where it sold its console at below cost price because they intended on getting into the market rather than making profit from one product launch. Nintendo Wii has 60 percent penetration among gamers aged six to 54 years old in the United States which is mainly caused by penetration pricing strategies (Lee 6).
Despite being a penetration pricing strategy, penetration pricing can also have positive results for business because consumers are more likely to purchase additional products if the initial product or service is priced low. This means that there is potential for up-selling and cross-selling which can bring a business a greater profit than the penetration pricing strategy. Take for example, the penetration pricing strategy of Netflix. In 2011, they launched their service offering streaming and DVD by mail rental at $7.99 per month (Parker 99). This was below cost price but the goal was not to make money from this one penetration launch of its streaming service; it was rather to attract more new members, upsell them on the DVD rentals and eventually create long-term loyal subscribers.
Because penetration price is also considered low price marketing, there are examples where penetration prices strategies can be used along with other forms of low price marketing such as promotions. New that come out every year need to have penetration prices so that they can gain a huge market share, while established brands with a loyal customer base do not have to use penetration price because there is less of a need for them to be competitive.
Penetration pricing strategy is still ideal when trying to introduce new products or services into the market since penetration penetration pricing strategy “can lead to faster growth, but it usually should not be used as a long-term competitive tool”.
The most common reason penetration pricing strategy is applied is due to target customers’ willingness-to-pay. For example, in the case of Netflix, the penetration launch was part of its plan which was designed to attract customers who were more price sensitive. While price may be one factor in penetration penetration pricing strategy, it is often combined with other strategies such as product penetration penetration pricing strategy and market penetration penetration pricing strategy.
As stated by Jerold L. Zimmerman and Daniel W. Connelly:
“Penetration penetration pricing strategy is a form of price discrimination that takes several forms depending on the particular objectives of the firm.” (Zimmerman & Connelly). For example, penetration penetration pricing strategy for one company may be to provide reasonable prices which will attract customers while another company’s penetration penetration pricing strategy may be to offer low prices at first but then raise them later in order to gain more revenue from those same customers (Weston p 181-184).
Price discrimination refers to charging different prices based on how much or how little a customer wants or needs the product. Therefore penetration pricing strategy generally focuses on how companies set their prices both initially and later in time to encourage customers to buy their products by minimizing initial price.
Generally penetration penetration pricing strategies may vary for each individual company but they usually include charging low prices at first or offering high quality products so that more people will begin using the product. Once penetration pricing strategies have been applied, “the firm uses other marketing tools such as advertising and promotions, service support, and trade deals with retailers” (Zimmerman & Connelly) to benefit its business model.
With penetration prices added into marketing mix strategies firms use this strategy to enter markets that are new or particularly attractive with low cost products because penetration pricing allows them to capture significant market share quickly. Penetration pricing is contrasted with skimming pricing where early customers are willing to pay premium prices for early access to products but penetration pricing is used to accumulate sales rapidly and penetration price strategy may be seen as a transitional tool between skimming and penetration prices.
The specific penetration pricing strategy that such firms use will depend on their marketing objectives, the number of competitors in the market and whether they are entering into new or established markets.
A penetration price can also be used by firms to avoid competing with other rivals on price because penetration prices do not attract customers who demand low prices and penetration pricing strategies should not be considered as a means to generate profit because it does not allow for recovery of fixed costs plus a margin. Nonetheless, penetration prices allow firms to enter high quality segments which might include customers who could become loyal patrons even if they purchase a premium price .