Customers can’t buy products they don’t know about. And in a market heavily driven by consumer trust and brand loyalty, many consumers are reluctant to switch brands or try new products. After all, the reasoning goes, why spend money on a product that might be awful?
That’s where penetration pricing comes in. Penetration pricing introduces customers to a new product at a steep discount, and often at a loss to the merchant. The hope with using a penetration pricing strategy is that you’ll create brand loyalty and get customers to love your product, increasing their willingness to spend more down the road.
Here are five examples of penetration pricing strategies being put to work. Follow one of these penetration pricing strategies and you’ll be investing in long-term profit, even if you carry a short-term loss.
Television and Internet providers are notorious for their use of penetration pricing — much to the chagrin of consumers who see massive sudden increases in their bills. Comcast/Xfinity, for example, regularly offers low introductory prices such as free or steeply discounted premium channels. At the end of a specified period, the price increases. Most consumers continue paying the higher bill, but some jump to a new provider offering an introductory rate.
Other utility providers also rely on penetration pricing. In a market increasingly dominated by smart phones, providers of landlines may use penetration pricing to get consumers to purchase a landline. Some even bundle these deals alongside cable, internet, and smart phone packages.
Smart Phone Providers
Let’s take for example, two major smart phone operating systems that use vastly different pricing strategies.
Android aims for greater market penetration with a penetration scheme. Android phones are available at a steep discount, in the hopes that users will become loyal to the brand. This approach also opens a wider range of consumers up to the Android marketplace, while Apple embraces a skimming strategy, providing high-cost products that skim a small market share off the top.
A related penetration strategy popular among smart phone providers also uses penetration pricing. In this scheme, providers sell cheap or free smart phones in return for long-term contract with customers. Consumers get excited about the cheap phone, and fail to notice that the contract costs much more in the long-term than the phone would.
A Friday night trip to a video or DVD rental shop was a family tradition across the nation for at least a generation. When Netflix entered the market, it had to convince consumers to wait a day or two to receive their movies. To accomplish this goal, it offered introductory subscription prices as low as a dollar. The pricing strategy was so effective that traditional providers such as Blockbuster soon were edged out of the market.
Giveaways and BOGOs
Giveaways and buy-one, get-one (BOGO) sales can encourage consumers to spend more money than they otherwise would. These sales can also be an example of penetration pricing. Manufacturers may contract with merchants to offer a new product for free with the purchase of a related product. The manufacturer temporarily loses money, but does so in the hopes of creating interest in the new product.
Many new foods introduce themselves to the market with a penetration pricing strategy. Some businesses even give packages of new products away by, for example, sponsoring events and providing sample packs to attendees. In one notable such example, Frito-Lay introduced Stax to the market in 2003. The brand was a direct competitor to the well-established Pringles line of chips.
To draw more business, the company offered the chips at a steep discount of $0.69 per canister. This earned the brand prominent display locations at many retailers. When the chips had fully penetrated the market, the price quickly rose to well above $1.