Implementing a penetration pricing strategy

Learn more about penetration pricing and how PricingHUB can help you implement it effectively. PricingHUB is a Saas that helps you optimise your pricing using artificial intelligence to multiply your sales and boost your margins.

Request a demo

What is a penetration strategy?

A penetration strategy, or penetration policy, is a pricing strategy used when launching a product on a market. The price associated with this strategy is called the ‘opening price’. The aim of this method is to gain market share, usually in the face of strong competition, but it is also recommended for a new product whose market is uncertain.

The aim of the strategy is to apply very low prices and then potentially raise them in the future. This pricing strategy makes it possible to reach a maximum number of prospects, build loyalty and make demand rigid. It is particularly aggressive and is the opposite of the skimming strategy.

When should your company implement a penetration strategy?

Applying a penetration strategy has a number of advantages and disadvantages for companies. The main advantage of developing this type of strategy is to gain a foothold in a competitive market and win market share.

The advantages of a penetration strategy

Winning over new customers

There are many advantages to a penetration strategy. Aggressive pricing makes it possible to win over and retain customers.

Indeed, thanks to this strategy, a company that offers its products at lower prices than the competition can win market share by attracting customers from other companies. Once the new customers have been won over, the company simply needs to retain them by offering them an increasingly high-quality and unique product, which it can then offer at a slightly higher price over the long term.

Reducing competition

In some cases, this strategy can reduce competition.
By introducing a low selling price, some competitors will not be able to compete in this market, as it will not be profitable enough for them if they ever position themselves in the same price segment. It is therefore important to monitor the prices of your competitors’ products in advance, in order to analyse the possibility of positioning yourself as a market leader. PricingHUB offers an automatic price tracking service for analysing the competition in a market segment and therefore putting all the chances on your side.

Economic benefits

For an elastic good, low prices increase demand and sales volumes, offsetting lower margins. However, larger volumes can generate economies of scale and thus reduce production costs.
In addition, to meet the demand attracted by low prices, the company developing its business will be able to diversify its distribution channels, optimise its sales and improve its brand image and area of influence.

The disadvantages of the penetration strategy

A potential price war

The disadvantage of establishing this low-price policy is that your competitors will respond by lowering their prices, which in turn will force you to lower yours, thereby reducing your margins. You will then enter a price war.

Bad customer experience

If you subsequently increase your prices, it is important to also increase the quality of the service you offer. If the company does not offer a superior service or product, the customers acquired as a result of the penetration policy will not accept this ‘unjustified’ increase and may leave for the competition, especially if the latter has a more competitive penetration strategy than yours.

Examples of successful penetration strategies

To make this concept clearer, we decided to take the example of Netflix. The American brand launched its $1 platform in order to capture a share of an entertainment market with a large number of major leaders. Then, little by little, Netflix was able to raise its price by improving the quality of its platform (e.g. multi-person accounts, richer catalogue, etc.) in order to achieve optimum profitability and in turn become the leader in this extremely competitive market. It should be noted that the American company has been using pricing AI for several years to adjust and reduce its costs and build customer loyalty.

Implementing a successful penetration strategy with PricingHUB

Thanks to its pricing AI, the PricingHUB platform enables you to put in place a successful penetration strategy. Once you have defined your business objectives, the machine learning adjusts continuous price elasticity tests to adapt to changes in demand and optimise your launch price so that it is in line with your objectives. We also offer market price tracking to take competitive data into account when optimising prices, and to adapt them automatically using pricing rules.
Finally, our team of experts is on hand to help you automate your pricing. Don’t hesitate to contact us to see how we can launch a successful pricing policy together.