This strategy worked, and Kindle became a huge success. AmazonĪmazon used penetration pricing when it first launched its Kindle e-reader by offering it at a lower price. This strategy helped Netflix quickly establish itself as a dominant player in the streaming industry. When Netflix expanded its streaming services globally, it adopted penetration pricing by offering low monthly subscription fees. Netflix is a prime example of successful penetration pricing. Real-world Examples of Penetration Pricing Netflix Since these companies may have enough resources available, they may be able to sacrifice short-term profits to establish their new products. Established Businesses that Offer New ProductsĮstablished firms can also use penetration pricing when they launch new products. These firms use penetration pricing to steal market share from existing firms. Penetration theory is often used by businesses that are new to the market. There are two primary users of penetration pricing, as explained below: New Businesses Some examples of such products include the internet, cable, and software-as-a-service (SaaS) products. Penetration pricing is suitable for those products that are used by mass markets and are not so unique and innovative. What Types of Products are Suitable for Penetration Pricing? It means the customers should be price sensitive, and charging a lower price should increase the quantity demanded by a large percentage. The demand for the product is price-elastic (PED > 1).The business is aiming to get economies of scale benefits, which are only possible when production is done on a large scale.For high-quality and innovative products, price skimming may not work. The product offered by the business is not so unique or truly innovative. There is a little product differentiation in the market.The business is using mass marketing, and the objective is to get a large market share.Penetration pricing is considered a suitable and appropriate pricing strategy if the following conditions are met. Once the lowest layer is captured and the market share is established, the price can then be increased gradually to target other layers of the market as well. As a result, the business can rapidly gain a substantial portion of the market. This low price serves as a powerful incentive for customers to choose the new product over existing alternatives. A diagram illustrating the working of penetration pricing. In penetration pricing, a business enters the market from its lower end by setting an initial low price, as shown in the following diagram. The customers with low purchasing power make up the highest proportion of the market. The market for a product can be divided into different layers of customers based on their purchasing power. Understanding the Working of Penetration Pricing Once they have captured their targeted market share, they can raise prices to increase profits and reflect the product's rising value. By attracting customers with a lower price, businesses can establish themselves in the market and gain a foothold. The theory behind this strategy is that a low initial price will disrupt existing businesses by luring customers away with a much lower price. This lower price point will generate demand and build a customer base in a short time. The primary objective of penetration pricing is to capture market share by offering a lower price than competitors. Pricing is a crucial aspect of any business strategy.

This pricing is also called market penetration pricing. If the product gains a large market share, then the price can slowly be increased. This low price is often supported by strong promotion in order to achieve a high volume of sales and capture a large market share. Penetration pricing means setting the price of a new product or service initially very low and then gradually increasing it over time.

Penetration pricing example