Is penetration pricing a viable strategy?
Online store owners face a lot of competition. In fact, there are reportedly 9.1 million eCommerce websites or "etailers" in the world—and 2.5 million of them are in the U.S. Getting shoppers' attention amid so much noise is, to say the least, a challenge.
This is what makes penetration pricing so attractive. This pricing strategy offers a simple approach to drumming up interest around your brand. In this post, we'll unpack the meaning of penetration pricing, explore how it works, and evaluate whether it’s right for your business.
Read Also: Best online payment solutions
What is penetration pricing?
Penetration pricing is a competitive price-reduction strategy that you can leverage to attract customers and gain market share. The idea is to lower the price of a new product or service enough to catch shoppers’ attention and incentivize them to buy from you. This is a popular pricing strategy especially in saturated product categories.
How does penetration pricing work?
Creating a penetration pricing strategy is relatively simple. You start by introducing a new product or product line with a low initial cost, then keep the price low until you hit a predetermined goal. The goal could involve a certain number of customers, a revenue target, total products sold, or another key performance indicator (KPI). Once you reach your goal, you’ll begin to gradually increase your price or introduce higher-priced versions of your product.
Examples of penetration pricing in action
Netflix
When Netflix launched in 2000, the company allowed their customers to rent four DVD movies at a time without any fixed return date (meaning, no late fees). They charged $15.95 per month for this service. This meant that people could rent all the movies they wanted in a month for one low monthly fee. Customers could also hold onto their movies for as long as they wanted.
This was a real bargain compared to the biggest movie rental player at the time, Blockbuster— which charged $4.99 for a three-day rental and a $1 per day late fee. These charges added up quickly, particularly if you rented more than one movie at a time and returned them a few days late.
Ultimately, Netflix’s penetration pricing approach helped to build it into a household name. Netflix now boasts 221.6 million subscribers. (Meanwhile, by November of last year, there was only one Blockbuster store left standing.)
IKEA
Penetration pricing is a strategy for IKEA, which regularly uses this tactic to enter new markets. When the company first expanded into the U.S., it offered low prices on its products in order to gain a foothold in the market.
These days, IKEA is still known for offering low prices on popular furniture items, and has a knack for attracting budget-conscious shoppers. IKEA is able to sustain low prices through a variety of other behind-the-scene strategies:
Designing furniture that can be packed flat and assembled by customers—which, in turn, reduces shipping and storage costs
Opening smaller showrooms in new markets—which allows the company to keep launch costs low while still attracting customers
Running sales and promotions that regularly drive traffic to its stores and website (e.g., its annual "Kitchen Event" and "Bedroom Event")
MeUndies
MeUndies, a subscription-based direct-to-consumer (D2C) clothing brand, took a novel approach to penetration pricing. They combined penetration pricing with a subscription box model.
MeUndies launched with just one product—a luxury men's boxer brief. That same pair costs $26 today, but if you sign up for their monthly subscription the cost drops to $18.
Note that when MeUndies launched, subscription models for things like underwear just weren't a thing. But Jonathan Shokrian, the company's founder, was inspired by a poor experience he had buying underwear. MeUndies’ subscription price model was subsequently created to appeal to men who tend to procrastinate when it comes to buying underwear.
Penetration pricing strategy still works in the company’s favor by incentivizing new buyers to sign up for a subscription, rather than buying a single pair of underwear (or other clothing) at full price. This strategy has paid off: the company's sales reached $100 million in 2020 and the company has sold more than 17 million pairs of underwear.
Advantages of penetration pricing
There are several clear advantages of employing a penetration pricing strategy. This strategy can help you:
Build market-share – Back in 2000, Netflix was at a huge disadvantage compared to Blockbuster. Their penetration pricing approach helped them lure customers away from the dominant player in the video rental space. The monthly price was low enough to convince people to give Netflix’s unique business model a chance.
Attract price-sensitive customers – Penetration pricing isn't necessarily about having the lowest possible price. It’s about getting customers interested in your product by offering a good deal. The promise of being able to try new high-quality products—like MeUndies’s briefs—combined with a limited-time offer (“try now before the price increases”) can often motivate shoppers to give you a try.
Accelerate brand awareness and loyalty – If you’re a small, new, or relatively unknown brand, then penetration pricing can help to build awareness. This was the case for Netflix, IKEA, and MeUndies—alongside many other D2C brands like Allbirds and Who Gives a Crap (a toilet paper brand). The loyalty should follow shortly afterwards, once you’ve established yourself as a company that consistently produces a high-quality product and exceptional customer service.
Disadvantages of penetration pricing
As with all eCommerce discount pricing strategies, there are some downsides to penetration pricing. They include:
Low profit margins – The biggest drawback to penetration pricing is that it can lead to thin profit margins, especially in the early stages. You must be willing to take a hit now to gain traction later. It took MeUndies five years to make a profit, but waiting it out paid off (and then some) for the company, which recently received $40 million from an investment group.
Difficulty raising prices – Customers who are initially attracted by your low price may not stick around once you begin to raise prices. One way to mitigate this is to introduce a new, slightly more expensive product. For example, Allbirds launched with one type of wool sneaker for $95, but subsequently introduced a high-top version of the sneaker that sells for $115.
Competition from other brands – When a product becomes popular, competitor copycats begin to flood the market. For example, Amazon offers a range of much cheaper modal-fabric underwear in styles similar to MeUndies. At one point, Amazon also sold a wool sneaker that was nearly identical to Allbirds, but sold at less than half the cost (that product appears to be gone now).
Staying too low for too long – You can't stay in the penetration pricing zone forever. If you do, your brand could become associated with poor quality and low price (think Dollar Tree). Additionally, staying too low for too long might make it difficult to raise prices down the road when profit margins start to thin.
Best practices for implementing penetration pricing
Using newborn clothing as an example, here are some best practices to consider when implementing a penetration pricing strategy:
Identify and define your target audience - Here's the scenario: you've established yourself as a reliable online children's clothing boutique and want to expand your market by introducing a line of eco-friendly onesies for newborns (like babywear brand Bonsie). The first step in creating your penetration pricing strategy is to identify exactly who you plan to sell the onesies to. Your target market could be your existing customers who may be planning for or expecting a baby. It could also be first-time parents who've never shopped with you before. You could additionally lean heavily into gifting which would appeal to grandparents, friends, and anyone looking for a unique baby gift.
Create a buyer persona - Once you identify your target audience, you can begin to build a buyer persona (or multiple personas) to inform your overall launch strategy, including your penetration pricing approach. This should list demographics like age, sex, and income. It could also include interests, priorities (e.g., organic, fair trade, etc.) and favorite brands. The more you clarify the pain points and motivations of your target audience, the better you can tailor your penetration pricing strategy to them.
Research and analyze the market - It's important to understand what other eCommerce small business owners are charging for organic cotton onesies. Use tools like Google Shopping or online marketplaces like Amazon to get a high-level view of prices for different products. Then drill down to brands, boutiques, and specialty websites to see what big brands and small online sellers are charging for newborn clothing. New parents are a passionate bunch, so visit forums on social platforms like Facebook and Reddit to see what they're buying and talking about.
Set an initial price that's lower than competitors - Once you understand the prices your competitors are offering and the product features that are most valuable to your customers, set an initial price. Your price should be lower than the average price for a similar product (but not too low). Make it clear that this is a limited-time introductory price. When setting your price, factor in things like product demand, unique product features, and how familiar consumers are with items like yours.
Establish a penetration pricing timeline - Decide when and how you'll raise your initial price. This step should ideally be done before introducing your launch price. The timing of your next price increase will depend on your business goals. You could time it for after a certain number of customers purchase from your store, after a set period of time, or both.
Reevaluate your strategy after the promotional period ends - After the promotional period ends, it's important to evaluate how successful your penetration pricing strategy was. Look at metrics like customer acquisition rate, sales volume, and customer retention rate. If you see a drop in customers once the promo period ends, you may need to lower the price again or make other changes to your marketing plan.
Launch your new products with confidence
Penetration pricing is a powerful tool when used strategically. By researching the market, being thoughtful about timing, and assessing results, you can reach new audiences while continuing to grow your business. When combined with other pricing strategies like discount pricing and odd-even pricing, you'll can build loyalty and keep customers excited about your products.
Read Also: How to start a business
Allison Lee
Editor-in-Chief, Wix
Allison is the editor-in-chief at Wix, with several years of experience reporting on eCommerce news, strategies, and founder stories.
