Whether you’re launching a new product or you’re trying to get a stake in a competitive market, your goal is to attract customers and stand out from other established brands.

So how do you do that?

Penetration pricing is one strategy that can be powerful when done right. Offering a product at a low initial price can help you gain market share quickly.

Does it always work, and are there ideal circumstances to use it?

This guide will cover the ins and outs of penetration pricing, including how it works, the advantages and disadvantages, and some best practices to keep in mind as you implement it.

Let’s get into it.

Penetration pricing: benefits, risks, and best practices

What is penetration pricing?

Simply put, penetration pricing is setting an initially low price for a product or service to entice customers to want to purchase or sign up. This also helps to gain market share.

Once you establish your customer base, you can gradually increase your prices to maximize profitability.

For industries with a lot of competition and price-sensitive customers, a penetration pricing strategy is particularly useful, since it helps to create brand loyalty before upping the cost of the product.

How does a penetration pricing strategy work?

With this strategy, your main goal is to build brand awareness and customer loyalty.

Here’s how it works:

  1. Set an aggressive entry price so that your product costs less than your competitors. This encourages prospects to try it out and potentially adopt it.
  2. Increase market share by attracting customers sensitive to price with low costs—this will increase your foothold in the industry.
  3. Gradually raise your prices once your brand is successfully established to increase profits. 
  4. Enhance your customer retention with consistent, competitive prices to drive customer loyalty and repeat purchases in the long run.
  5. Trust that word-of-mouth marketing will arise with compelling pricing—early users will share their experiences with people they know, which will generate organic growth. 

Penetration pricing example in the real world

Let’s break down this pricing strategy with a simple, real-world example.

Imagine a streaming service that just entered the streaming market offering very low subscription prices compared to their competitors.

The affordable pricing encourages mass adoption across viewers, and more people want to watch the shows and films that are being streamed exclusively on that platform—and even some that are available with other services. The best of both worlds.

Before they know it, customers decide to continue their subscription, becoming part of their ongoing catalog.

Once the streaming service gains a solid customer base willing to subscribe, the platform continues to add value to their product—be it new shows/films or features offered—and can gradually increase its pricing over time.

The key with penetration pricing is that it relies on its low prices to gain a portion of the market share from competitors before raising pricing. It’s similar yet distinct from ramp pricing, which you can read all about here.

Advantages of penetration pricing: When should you use it?

There are tons of ways to maximize your product pricing strategy. But when is penetration pricing the way to go?

Here are a few scenarios that would make this model particularly useful:

  • Entering a competitive market: If there are lots of similar product options available for customers to choose from, then lowering your prices might be the best way to compel prospects to try your version and/or switch from an established competitor.
  • Launching a new product or service: If your product is brand new, you need to quickly build awareness so that people know what you’re offering. Selling a product at a deal can help to spread the word that you’ve got something worth buying over competitors. 
  • High demand of service: Penetration pricing is super effective if the demand for a service or product is high. If there’s not a huge market for something, the price becomes less important in the big picture, whereas broad markets get more exposure. This means more consumers to capitalize on and retain. 

Additionally, this pricing strategy is a great way for you to build long-term relationships with your customers while encouraging repeat business.

Think about it: If customers are sensitive about price, the low cost of your product compared to competitors is a deal for them and an easy win for you.

But once they know the value of your product/service, they are likely to remain loyal and continue buying your product long-term—especially if it’s subscription-based.

Risks of penetration pricing

There are always some risks to consider when choosing a new pricing strategy.

Here are some potential penetration pricing disadvantages to keep in mind:

  • Lower profit margins: When it’s time to raise your prices after a certain period of time, you might struggle to cover costs if there’s a lot of resistance to the increase. 
  • Price wars: If you offer a low price, it’s entirely possible that your competitors will lower their prices in response. This could reduce the overall profitability of the market and can be ineffective when strategizing long-term. Have a contingency plan and keep tabs on how other companies are reacting.
  • Customer expectations: If your product starts at a low cost, customers might expect that cost to stay the same forever. That’s why it’s important to take a gradual approach and stay transparent with your customers. 
  • Brand perception: Sometimes, things seem just too good to be true. This can be the case with products, as a lower price can occasionally give customers the impression that your product is a lower quality than competitors. Make sure to keep the price affordable yet reasonable. 
  • Price increase without value-add: If your prices rise too quickly, your customers might feel confused and frustrated, especially if there’s no clear value being added to their service. Marketing efforts and offering extra perks can be valuable in these scenarios, making sure your customers feel they are getting what they paid for. 

If penetration pricing doesn’t seem like the right fit for you, don’t worry—other pricing strategies could be effective. Demand-based pricing, for example, is all about using market demand to determine the price of a product or service.

What is price penetration vs. skimming?

Penetration pricing focuses on setting low initial prices, whereas price skimming does the opposite. It starts at a high price and gradually lowers over time.

So, when is price skimming most effective?

This strategy is more often used for innovative, premium, or even luxury products. It allows companies to maximize profits from their early customers before expanding to a wider audience.

Penetration pricing, on the other hand, is best if you’re looking to attract a broader customer base quickly since it will help you establish a foothold among the competition.

How to implement a penetration pricing strategy

Decided that penetration pricing is the right way to go?

Here are some best practices as you implement your strategy:

  1. Analyze the market: While it may seem obvious, your first step should be researching your competitors and the larger market. This will help you target the right prospects based on price sensitivity. 
  2. Set a sustainable entry price: Setting a low price to compel customers to bite does not mean you should put your financial health at risk! Make sure it’s effective in attracting the right clients while remaining manageable for a given amount of time. 
  3. Have a pricing transition plan: Make sure to map out your long-term pricing strategy, including when and how you will raise prices. At the end of the day, your goal is to be profitable, so thinking ahead is crucial. 
  4. Monitor customer feedback: Listen to your customers—if something’s not working, be prepared to adjust your strategy as needed. Remaining agile from the start can be helpful in the long game. 
  5. Use CPQ software: The right configure, price, quote (CPQ) tool can make pricing adjustments a breeze, plus it will help you manage your quotes more efficiently. More on this below! 
  6. Show your customers the value: Customers need to know what they are paying for is worth it. You can do this by highlighting product enhancements, service improvements, or exciting new features that can help justify the price increase. 

How CPQ can help support penetration pricing

Penetration pricing is all about offering a lower price to customers, with the intention of raising prices later.

You can make this process easier for your sales team with CPQ software, which simplifies price adjustments and helps them generate fast, accurate quotes.

PandaDoc CPQ can do this while tracking pricing data, which gives you valuable insights on your pricing performance and customer behavior.

What does this mean for your sales team?

Reps can adjust pricing in real time so that every quote shows the most up-to-date information and aligns with your pricing strategy.

Need support with CPQ?

Learn more about how PandaDoc CPQ can help support a demand-based pricing strategy and help your team generate fast, accurate quotes.Get your personalised demo

Want to dive deeper? Explore how you can maximize your pricing strategy with CPQ here.

The bottom line

If you’re ready to break into a competitive market and gain customers quickly, penetration pricing might be the best strategy for you.

With PandaDoc, you can optimize your pricing strategies for a smoother pricing transition and improved profitability.Ready to see how PandaDoc can work for you? Request a free demo today.