When Is Market Penetration Pricing A Good Idea?

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Market penetration pricing is one of the most easily recognizable strategies in business. When you see some company offering a “Special introductory offer,” they are probably engaging in penetration pricing.

This strategy involves setting a super low price for a good or service in hopes that you will be able to immediately gain huge market share. The idea is that eventually you will be able to increase prices to a level that allows you to make a healthy profit without putting off to many of your customers.

In a July 2011 article from The Harvard Business Review, James Allworth explained why he would not be switching his music library to the recently introduced Spotify platform. Allworth proposed that because the way we consume music is different from the way we consume movies (i.e. listen to songs and albums repeatedly as opposed to watching movies once or possibly twice) a rate increase on Netflix would not be the same as the same on Spotify. A Netflix customer would not feel remorse over losing those episodes of Mad Men that they have watched three times each already the same way that a Spotify customer might feel remorse over losing access to that Beatles Box Set.

“This makes it the ultimate breeding ground for a bait-and-switch strategy: once you’re invested, your willingness to pay goes up dramatically,” Allworth wrote.

The ethical merits of market penetration could be debated endlessly, but the fact remains that this can be a very effective strategy when executed properly. Generally, if your company advertises that the low price is a limited time offer so it isn’t made clear that the good or service is normally offered at higher rates. For subscription services like Netflix or Spotify Premium, this becomes an especially hairy situation because payments are recurring.

Market penetration strategy can be a great method for gaining market share, especially when the cost of switching to a competitor is high, in a situation like that of Spotify or a cable service. In a market where a lot of companies are offering similar products, market penetration pricing can help set your company apart from the competition. The key to successfully and ethically implementing this strategy is to make it abundantly clear that the low price is a limited time offer. If your customers were not made aware that the price was a limited time offer, they will be much more likely to ditch your product or service as soon as the price goes up again.