What is penetration pricing, how it works & benefits

You’ve probably heard the saying, “Go big or go home,” right? That’s what penetration pricing is all about, but in a smart, calculated way. It’s a strategy where you start low—like, crazy low—to get everyone hooked.

Then, as your product gains traction, you keep adjusting the cost.

It’s one of the most effective ways to draw in customers fast and make a name for yourself in a crowded market.

Almost every brand—new or established—uses penetration pricing strategies in one way or another.

But it’s most common in industries where price sensitivity is high, competition is intense, and products have low differentiation. 

If you’re curious about how this strategy can help you crush the competition and grow your eCommerce or SaaS business, you’re in the right place.

In this blog post, we’ll break down everything you need to know about penetration pricing.

We’ll also dish out some killer strategies that worked for big brands and give you extra tips to fine-tune your pricing game.

What is penetration pricing?

Penetration pricing is a strategy in which a company sets a low initial rate for a product or service to rapidly gain market share.

This tactic aims to grab attention quickly, attract as many customers as possible, and quickly build a loyal base.

However, it’s not just about cutting costs.

The whole point is to get people obsessed with your product or service.

The result? When you eventually jack up your prices to more sustainable levels, your customers will stick around because they’ve already fallen head over heels for what you offer.

This strategy is commonly used by:

• New brands entering a market for the first time, where gaining visibility quickly is crucial.
  
  
• Established companies launching new products, aiming to disrupt the market and capture attention.
  
  
• Businesses selling price-elastic goods, where demand significantly responds to changes in price.

In essence, penetration pricing is about making a strong entrance, gaining a foothold in the market, and winning customers over early to set the stage for long-term success.

Real-world examples of penetration pricing

Here’s the thing: penetration pricing isn’t just a tactic for startups—it’s a strategy used by almost every brand at some point.

In fact, some of the biggest names in various industries have successfully leveraged this approach to dominate their markets.

Don’t believe us? Check out these real-world examples that show how effective penetration pricing strategy can be:

1. Netflix

Remember when Netflix first came out? They used penetration pricing to take over the streaming world.

By starting with a super low introductory price, they pulled customers away from old-school options like Blockbuster. 

This smart move helped Netflix quickly rack up subscribers and become the king of streaming.

Over time, they upped their prices but kept adding more content, so people stuck around.

That’s how they took over 51% of the US streaming market, leaving traditional rental services in the dust.

2. Comcast

Cable and internet providers like Comcast frequently use this approach to attract new customers.

They hook you with promotional deals—think discounted rates or free premium channels for the first year or two.

Once you’re in, they slowly raise the prices. 

But despite the gradual price rise, a lot of customers choose to stay because they like the service.

Comcast has been playing this game since 2011, and now they control over 40% of the US broadband market.

3. Spotify

Spotify nailed its market penetration pricing strategy, too.

To attract users, they offered free and super cheap premium memberships.

The free tier lets you enjoy music with ads, while the premium trial gives you an ad-free experience at a low cost. 

This approach quickly hooked millions of users, and many of them ended up paying for a subscription because they loved the service.

Today, Spotify owns about 36% of the US music streaming market—way ahead of Apple Music and Amazon Music.

But it’s more than just streaming and internet services that pull this off.

‍Smartphone brands like Xiaomi and OnePlus made a splash by offering high-end phones at prices way lower than big names like Samsung and Apple.

Retail giants like Ikea, Walmart, and Costco use similar tactics to keep customers coming back for more.

And you’ve probably seen this in action with almost every SaaS company and eCommerce brand out there.

Those free trials you’ve used for a VPN, antivirus, or design software?

And those buy-one-get-one deals and massive discounts from your favorite sneaker or apparel brand—that’s penetration pricing strategy at work.

The advantages and disadvantages of penetration pricing

Penetration pricing is like any strategy—it has its perks, but it’s not without its pitfalls.

Have a look at the infographic below and explore more about advantages and disadvantages of penetration pricing:

Now, let’s break down the pros and cons so you can decide if it’s the right move for your business.

Advantages:

1. Rapid market share acquisition

If you’re new on the scene, slashing prices (strategically, of course) can help you quickly attract customers, pulling them away from competitors and giving you a strong foothold in the market.

This method is heavily utilized by SaaS startups that launch on platforms like ProductHunt.

2. Quick customer base growth

The appeal of a great deal can help you build a large customer base quickly.

And if your product delivers, these early adopters could turn into long-term loyalists, giving you a stable revenue stream down the road.

3. Increased brand visibility

By pricing your product competitively, you can raise your brand’s profile in a crowded market.

More people will notice your product, which can lead to word-of-mouth promotion and wider recognition.

4. Higher sales volume

Lower prices generally boost demand, leading to potential surges in sales.

This not only improves cashflow but also reduces storage costs, as products move off the shelves faster.

Established eCommerce brands, like Amazon, frequently use penetration pricing to clear seasonal inventory and during holiday promotions.

5. Barrier to entry for competitors

Your low rates can make it tough for new brands to enter the market or for existing ones to maintain their market share without cutting their own prices.

Often, competitors might not be willing or able to engage in a price war, giving you a competitive edge.

6. Appeal to price-sensitive consumers

If you’re targeting a particularly price-conscious market segment, this strategy can help you capture a large share of this audience quickly.

This is especially effective in industries like consumer retail, where price sensitivity is high.

Disadvantages:

7. Initial profit margins

Starting with low prices often means accepting lower profit margins.

This can strain your finances and cashflow, especially if your operating costs are high or if raising prices takes longer than expected.

8. Potential for price wars

Setting low prices can trigger competitors to follow suit, resulting in a price war.

This situation can significantly erode profit margins for all businesses involved, making it challenging for anyone to maintain profitability.

An obvious example of this can be seen in the telecom industry, where intense price competition frequently leads to similar outcomes.

9. Customer loyalty issues

The customers you attract with low prices might not stick around if you raise those later.

They could easily be lured away by another brand offering a better deal, leading to a revolving door of bargain hunters.

Other than these, implementing a penetration pricing strategy requires a significant investment in marketing, production, and distribution to work effectively.

These upfront costs can be substantial and a major roadblock, especially if you’re just getting started.

Our tip: penetration pricing focuses on short-term gains—building market share quickly.

If you want to get value out of it, you’ll need a solid plan for long-term sustainability.

Otherwise, you might struggle to maintain profitability once you try to shift from growth to retention.

Deciding what’s best for your business often requires trade-offs.

Learn what opportunity cost is and how it can help you with strategic decision-making.

When to use penetration pricing?

Although penetration pricing isn’t a one-size-fits-all strategy, it can be incredibly effective in the right situations.

If you’re thinking about implementing this valuation technique for your eCommerce or SaaS brand, we recommend that you consider the following variables:

• New to the market? A competitive price point could help you turn heads and win over customers from the big players.
  
• Dealing with price-sensitive customers? If your target audience watches every penny, a lower price tag might seal the deal.
  
• Got a high-demand product? If demand is through the roof, an attractive initial cost could create a serious buzz and drive sales skyward.
  
• Stuck in a packed marketplace? When competition’s fierce, this strategy could help you carve out your own niche.
  
• Branching out to new territories? Starting low can help you place your product in front of a larger audience.
  
• Trying to boost brand recognition? An enticing offer can attract more eyeballs and get people talking.
  
• Looking to scale up? As your sales volume grows, production costs per unit often shrink, helping maintain profitability even with lower prices.
  
• Worried about rivals undercutting you? Dropping your prices could keep loyal customers from jumping ship.
  
• Need to clear out inventory fast? This approach can help you move products quickly without tarnishing your brand image.

So, what do you think? Does your situation fit any of these scenarios? If yes, rebalancing the price tag could give your business the edge it needs.

Getting your homegrown brand across borders can unlock numerous opportunities. Do it the right way with our in-depth guide: Why SMEs in emerging markets should try international trade.

Tips to maximize the impact of your penetration pricing strategy

Penetration pricing is a powerful tool, but it’s essential to use it wisely.

Here are some tips to help you get the most out of it:

1. Know your numbers

Understand your costs, break-even point, and potential profit margins.

This will help you determine the lowest price you can afford to offer while still staying afloat.

2. Focus on value

While the low price is a draw, it’s the product's or service’s value that will keep customers coming back.

Keep the standards high and ensure your offering is top-notch.

3. Monitor competition

Keep an eye on your competitors’ actions.

You don’t want to get caught in a price war or underprice your product/service—the goal is to always offer a better deal than others.

4. Set clear goals

Define what success looks like for your strategy.

Is it market share, customer acquisition, or something else?

Track and analyze key performance indicators (KPIs) relevant to your brand.

5. Invest in marketing

Low prices won’t matter if no one knows about them. Spread the news far and wide.

The best option is to increase marketing spending (think SEO, automation via AI tools, and ad campaigns).

6. Have enough buffer to maintain cashflow

Offering low prices without a solid financial cushion can be risky.

See to it that you have sufficient funds to cover costs during the initial period.

If needed, apply for traditional or alternative financing—whichever suits your needs.

7. Plan your exit strategy

Consider how you’ll gradually increase prices without losing customers.

This could involve introducing premium features or bundles, but don’t do it all at once. Keep your customers in the loop.

Our tip: be patient; it will take time. But don’t get disheartened.

Stick to the plan and combine it with effective marketing and sales strategies for maximum impact.

Don’t let cash crunches derail your penetration pricing strategy

Sure, penetration pricing is among the most popular techniques for establishing a market presence and attracting a customer base.

However, it’s not without its risks—especially for SaaS and eCommerce brands that rely heavily on customer revenue. 

No doubt, those low prices will bring in consumers.

But they might also leave you strapped for cash.

The rapid increase in sales volume won’t make much of a difference when you consider the reduced revenue per unit.

While it’s crucial to invest in growth, traditional financing options often fall short of meeting the unique needs of modern businesses.

Banks rely on outdated metrics and require extensive paperwork, making it difficult for startups to secure the funds they need.

This is where we come in. At Stenn, we understand the financial pressures that come with aggressive pricing strategies.

‍We’re all about making sure you don’t have to give up on your dreams just because of money troubles, which is why our financing solutions are designed specifically for today’s startups. 

For instance, our revenue-based financing model looks beyond just your bank account to consider all of your revenue streams, including transactional revenue. It’s quick, it’s easy, and it’s all about you—with approval decisions made in as little as 24 hours.

The best part: you get access to the capital you need without diluting your equity or facing restrictive terms.

Don’t let financial constraints hinder your growth. Let us help you turn your penetration pricing strategy into a success. Apply for Stenn financing today—it just takes a couple of minutes.