In a market driven by consumer trust and brand loyalty, many customers are often hesitant to switch brands or try new products. The barriers to entry in retail are high due to intense competition and a demanding consumer base. Retailers must adopt innovative strategies to stand out, grab the attention of potential buyers, and convert them into loyal customers.
This is where penetration pricing comes into play. Penetration pricing involves offering a new product at a significantly reduced price, sometimes even at a loss for the retailer. This strategy is designed to attract customers, gain market share, and create brand loyalty. The idea is that once consumers become familiar with and enjoy the product, they’ll be more willing to pay higher prices later on.
Here are five examples of companies successfully using penetration pricing. By following one of these approaches, businesses can invest in long-term profitability, even if it means absorbing short-term losses.
Netflix
Netflix is a prime example of penetration pricing done effectively. Many of us have heard people grumble about Netflix’s subscription prices rising or their free trial ending, but despite the occasional complaint, most are willing to pay the increased fees for access to an extensive library of quality content. Netflix currently dominates the U.S. streaming market, holding 51% of subscriptions. Other OTT platforms have also adopted penetration pricing to draw in new users.
Internet Providers
Television and Internet providers are infamous for their use of penetration pricing, much to the frustration of customers who experience sharp price increases after promotional periods. Comcast/Xfinity, for example, frequently offers attractive introductory deals, such as discounted premium channels or low-cost upgrades. Over the past five years, Comcast has grown its Internet market share from 56% to 64% in the areas it serves. While the increase may seem small, it signifies that Comcast’s customer base in those regions is now over 60% larger than its competitors. After the promotional period ends, prices rise, but many customers remain, while others seek out new providers offering similar deals.
Other utility providers also rely on penetration pricing strategies. In an era increasingly dominated by smartphones, landline providers often use penetration pricing to entice customers to sign up. These offers are sometimes bundled with internet, cable, and smartphone packages, creating an attractive deal that encourages consumers to keep or adopt landline services they might otherwise overlook.
Smartphone Providers
Take, for example, two of the biggest smartphone ecosystems that use very different pricing approaches: Android and iOS. Android, led by brands like Samsung, embraces a penetration pricing strategy by offering phones at significantly lower prices compared to Apple. This approach aims to build a wide customer base, fostering brand loyalty and attracting users into the Android ecosystem. In contrast, Apple follows a premium “skimming” strategy, setting higher prices and targeting a smaller, more exclusive segment of the market.
A similar penetration tactic often seen in the smartphone industry involves selling devices at steep discounts or even for free, in exchange for locking customers into long-term service contracts. Customers are drawn to the low upfront costs, but over time, they end up paying more through monthly service fees, making the strategy highly profitable for providers in the long run.
Gillette
Gillette is another excellent example of penetration pricing in action. By offering razors at very low prices or even giving them away for free, Gillette gains a foothold in the market. The real profit comes from selling razor blades, refills, and accessories at higher prices. This model has allowed Gillette to remain a dominant player in the grooming industry. In the fast-moving consumer goods (FMCG) sector, penetration pricing is an effective strategy for entering a crowded market and building strong brand recognition.
Food and Beverages
In the food and beverage industry, penetration pricing is often used to introduce new products. Companies will sometimes give away free samples or sponsor events to get products in consumers’ hands. Supermarkets like Costco and Kroger also frequently use this approach with organic products, offering them at lower prices to drive demand. Thanks to higher profit margins and economies of scale, these retailers can profit from increased sales volume even after temporarily lowering prices.
Another well-known example is Starbucks, which often introduces new or seasonal beverages at discounted prices. This entices customers to try new items. Once a new product has gained popularity and customer acceptance, Starbucks typically raises the price back to its normal level, driving long-term revenue from previously discounted offerings.
Penetration Pricing Across Industries
Penetration pricing isn’t limited to tech, retail, and FMCG industries. Hotels, airlines, and various consumer product companies also deploy this strategy to secure a loyal customer base. By implementing this tactic effectively, businesses can create a strong foothold in competitive markets. With the help of AI-driven price monitoring tools, retailers can gain real-time insights into their competitors’ strategies and market conditions, allowing them to fine-tune their penetration pricing tactics for optimal impact.
