Penetration Pricing: Features and Examples

A market penetration strategy, also known as a low-price strategy, enables a rapid increase in product sales volume. Retailers often choose this approach when entering a highly competitive market to quickly gain market share.

In this article, we examine the key aspects of a market penetration strategy, including benefits and drawbacks. Additionally, we provide practical advice and discuss examples of this strategy.

Contents:

What Is a Market Penetration Strategy?

Advantages and Disadvantages of a Low-Price Strategy

Penetration Strategy vs. Other Pricing Strategies

Low-Price Strategy Examples

How to Implement a Market Penetration Strategy

What Is a Market Penetration Strategy?

A penetration strategy is a marketing approach that involves implementing measures to rapidly capture market share for a new product or seller.

A key component of this strategy is penetration pricing (or a low-price strategy), which entails setting low prices upon entering the market and subsequently raising them once the desired market share is achieved.

Key Components of a Penetration Strategy

Pricing Policy

Penetration pricing includes a) setting prices below the market rate, and b) using discounts and promotional offers. This approach attracts consumer attention, expands the customer base, and helps the company capture market share.

Key preconditions for considering this pricing policy include:

• A sufficient quantity of goods to generate the high turnover necessary for reaching the break-even point
• Ability to produce goods in large volumes, reducing unit costs (economies of scale)
• Effective cost management in production and distribution, optimizing logistics and reducing overhead
• A significant proportion of price-sensitive consumers (particularly relevant for mass-market goods and services such as food, hygiene products, household appliances, electronic devices, and mobile services)
• Sufficient financial resources to maintain low prices in the early stages (a safety margin until the break-even point is reached)
• Stable relationships with suppliers of goods (for retailers) or raw materials and components (for manufacturers)
• Lack of desire among competitors to lower prices to avoid destructive price wars

Aggressive Marketing 

A market penetration strategy usually involves aggressive marketing campaigns to maximize audience reach. A notable example is the bold and provocative “Swap and Save” promotional campaign by German discount supermarket Aldi when entering the Irish market.

The campaign aimed to show consumers how much money they could save by shopping at Aldi. The main promotional elements included TV commercials showcasing real customers and in-store banners highlighting price differences (Aldi vs. other supermarkets), encouraging consumers to “swap” their usual products for Aldi products.

Additionally, Aldi actively used user-generated content (UGC) on social media, encouraging customers to share their stories and savings experiences using the hashtag #SwapAndSave.

Distribution Expansion

Increasing the number of sales points is another crucial element of a penetration strategy. Opening new stores in different regions, partnering with major retailers, and leveraging online sales channels (such as selling through your own online store, partnering with other online retailers, and entering marketplaces) all enhance product availability.

For example, IKEA continuously expands its global network by opening stores in new cities and countries while actively developing its online sales channels.

Advantages and Disadvantages of a Low-Price Strategy

A penetration strategy requires temporarily reducing profitability to scale the business. While setting product prices below market rates can attract customers, it also involves risks for the company. It is important to carefully assess both the benefits and risks of a low-price strategy to decide if it is the best fit for your business.

Advantages

• Rapid customer acquisition: Price-sensitive customers will prefer your product as it costs less than competitors’ alternatives, quickly expanding your customer base and increasing brand recognition.
• Quick market penetration: The more customers you have, the fewer your competitors have, strengthening your market position.
• Positive company image: By offering quality products at affordable prices, a company can establish a friendly and positive image among consumers.

Disadvantages and Risks

• Low profitability: This is especially relevant at the initial stages of implementing the strategy.
• Risk of failing to meet customer expectations in the long term: When you eventually raise prices, you may face negative consumer reactions, leading to loss of brand loyalty.
• Risk of failing to achieve break-even: The break-even point determines the minimum sales volume necessary to cover costs with revenue.
• High risk of price wars: A low-price strategy might encourage competitors to reduce their prices as well, resulting in price wars that can cause losses for all market players.

To manage these risks, it’s crucial to perform a detailed market analysis, create realistic sales forecasts, efficiently manage costs and marketing, and anticipate competitors’ reactions.

Penetration Strategy vs. Other Pricing Strategies

Penetration Strategy vs. Price Skimming 

Both of these strategies are applied during the early stages of the product life cycle, but they take opposing approaches. Penetration pricing uses a low initial price to attract buyers, whereas price skimming starts with a high initial price to maximize profits.

Penetration Strategy vs. Predatory Pricing 

While both strategies use low prices to attract customers, their ultimate goals are different. A company employing predatory pricing seeks to dominate the market and later raise prices without facing competition, which can harm the entire industry. This approach is prohibited by antitrust laws in many countries.

Low-Price Strategy Examples

• Netflix offers a textbook example of a low-price strategy. They began with free subscriptions and gradually increased service costs over time. Despite some dissatisfaction, most customers did not cancel their subscriptions due to the high-quality content offered.
• Starbucks often reduces prices for new products. For instance, seasonal drinks are introduced at lower prices, popularizing them among new and regular customers. Once this goal is achieved, the products are sold at full price.

How to Implement a Market Penetration Strategy

Here are 10 tips for successfully implementing this strategy:

1. Research the market: Analyze competitors, demand trends, and market volumes in your niche or category. Use various data sources, such as reports from leading international analytics companies (GfK, Euromonitor, IDC, etc.). In these reports, you can find information about market leaders as well as their market shares, sales distribution across different channels, consumer trends, etc.
2. Analyze market prices: Gather information on current market prices to determine the optimal price level.
3. Explore consumer price sensitivity: How will customers react to future price increases? What are they willing to pay more for, and what are they unwilling to pay for? Answers to these questions will help you better understand your customers. One common approach for determining price sensitivity is the Van Westendorp method. It helps you find the optimal price range for a new product by assessing consumers’ perceptions of its value and willingness to pay for it.
4. Develop realistic sales forecasts: Estimate sales volumes based on market conditions.
5. Prepare a long-term plan: Think about how your company will maintain and enhance its market position after raising prices.
6. Ensure a financial buffer: Make sure your company has enough resources to sustain the market penetration strategy in its early stages.
7. Highlight price advantages: Your marketing communications should clearly highlight the benefits of your offers.
8. Identify non-price benefits: Work with non-price product advantages, such as service, accessibility, quality, and additional value. In the future, these benefits will help retain customers after the low-price period ends.
9. Implement competitor price monitoring: Track competitors’ prices, conduct market price analysis, and analyze trends. If you work in a highly competitive niche, have a large number of SKUs, and plan to implement a competitive pricing strategy and market analytics, solutions like Pricer24’s price monitoring tool will be the best option.
10. Track results: Constantly analyze the results of the penetration strategy, track sales, gather customer feedback, and monitor competitors’ reactions.