Penetration Pricing Examples
Penetration pricing is a common strategy often used for new company or product launches. The intent is to attract customers and generate increased sales volumes by establishing a relatively low price point for the industry or product. While this approach can lead to a price-oriented customer base, it has been used effectively by companies to enter the market.
Frito-Lay launched its Lay's Stax brand of potato chips in August 2003. This particular chip was intended to compete directly for business from fans of the popular Pringles brand chips. The curved shape and texture of the chip were virtually the same. The tall, cylinder-shaped canister was nearly identical, too. During the first few months of the product launch, cans of Stax were available for $0.69 in grocery stores. After the initial penetration strategy to draw customers, the common supermarket price rose above $1. A similar approach of offering low price points and working with retailers to get prominent display positions can help local manufacturers and distributors attract interest from local buyers.
Online, mail-order and streaming movie rental company Netflix launched in 1997. The initial service packages included one-, two- or three-at-a-time DVD rental plans with tiered price points. The initial price of the company's "best value," the three-at-a-time package was $14.99. For customers who turned around at least three movies each week, this amounted to a little over $1 per DVD during the month. The purpose of the price at that time was to attract customers away from Blockbuster. The pricing strategy, combined with first-mover advantages in mail order and streaming technology helped Netflix pull in subscribers, which contributed to Blockbuster's demise. A small company with an innovative offering can learn from the initiative shown by Netflix. By using low initial price points to build a massive customer base before larger competitors enter the market, you have a sustainable competitive advantage.
As an industry, hospitality has been ripe with penetration pricing. Virtually every airline has used this strategy at one point or another to attract customers or to remain competitive. The excessive use of price-driven marketing has contributed to the large number of unprofitable and failed airlines in the late 20th to early 21st centuries. Similarly, hotels constantly use discount rates and promotions. Econo Lodge, Super 8 and Motel 6 are examples of hotels and motels that perpetually use penetration pricing to compete against larger scale operations. Small companies may find limited success using penetration pricing in markets already ripe with low-cost providers. Small businesses often have greater advantages in customized services and specialized products.
In many industries, one company enters the market with a penetration pricing strategy and is able to maintain a low price approach over the long term. No company better illustrates this than retail discount giant Wal-Mart. The company promotes itself with an "Always the low prices" mantra and has been the target of criticism because of its ability to enter small communities, attract customers from local businesses and eliminate competition. As a long-term strategy, penetration pricing requires the company to maintain low-cost operations, including inventory costs, labor, supply chains, and operations. Again, penetration pricing may not work as a long-term play for a small business, unless you have unique access to low-cost suppliers and run highly efficient operations.