Penetration Pricing: How It Works, Examples, and Pros and Cons

Breaking into an established market as a newcomer requires strategic thinking. Customers may not yet recognize or trust your brand, which presents a challenge for sales teams. How can you convince customers to try your product or service?

One solution is a penetration pricing strategy — intentionally setting prices lower than the product's actual value so you can enter competitive markets, build market share, and gain customer trust. For sales teams using revenue management software, understanding penetration pricing is crucial for developing market entry strategies that lead to sustainable growth.

Penetration pricing is a strategic approach where companies set initial prices below market levels to attract new customers and quickly gain market share. It is a deliberate tactic that lowers the barrier to entry by creating an attractive entry point for customers who are price-sensitive or hesitant to try something new. Penetration pricing provides a way to quickly hook customers and deliver value up front, allowing you to nurture customer loyalty and retention post-sale.

Penetration pricing operates through a well-planned cycle of market entry, customer acquisition, and gradual price optimization. Companies begin by analyzing competitor pricing and setting their initial price point substantially lower. A cost analysis is performed to determine how much to reduce the price, ensuring the company can sell the product or service at that price while still maintaining quality. Although this strategy isn't sustainable over time, it shouldn't be impossible to maintain initially.

The goal is to attract customers who might otherwise choose established alternatives. Then, as your customer base grows and brand recognition increases, you gradually raise prices to match market levels while building customer relationships. Combined with effective sales automation tools, you can efficiently handle the customer acquisition process and identify when to make price adjustments.

Penetration pricing is most effective when launching a new product in a highly competitive market, especially if the product has broad appeal and your company wants to scale quickly. Competing against other businesses is already a top challenge. According to the Salesforce State of Sales report, 57% of sales professionals say marketplace competition has gotten trickier since the prior year. This makes it especially tough when introducing something new — but the strategy works well for subscription-based services, selling digital products, and markets where customers have low switching costs.

Penetration pricing offers several key benefits for companies entering competitive markets:

• Increased customer base: Low prices attract and encourage hesitant customers to try your product, allowing you to capture significant market share before competitors can respond effectively.
• Brand awareness: With a larger customer base, your brand — or product, if you're a well-known company — begins to build a reputation for results, service, and value.
• Product visibility: By attracting customers with lower prices, you increase the number of people becoming familiar with your product.
• Improved cash flow: These benefits compound and create a network effect, where rapid user acquisition adds value because a larger customer base appeals to partners and investors. It also generates additional cash flow, which you can reinvest in the product to grow its value.

For sales teams in particular, penetration pricing stands to impact your sales revenue with smaller deals, but more of them. Over time, sales performance management software can help you identify optimal timing for price increases.

Here are a few examples of when penetration pricing can be applicable and successful:

I once worked with a software as a service (SaaS) startup that launched a new project management tool. Initially, the company used penetration pricing to attract small businesses and freelancers, quickly gaining a user base and valuable feedback. As the product improved and gained traction, it adjusted its pricing to reflect the enhanced features and broader appeal, transitioning to a more premium pricing model.

Major streaming services often capture customers at a lower price point and then gradually raise their monthly subscription fees. Sometimes these rate hikes hit the news, but the streaming market is fiercely competitive, which forces companies to adjust. Value comes from the high-quality, original content that these companies produce and the talent they attract, but offering low initial prices helps introduce this content to new audiences.

Many retail-based subscription services use penetration pricing to enter the market. It's common for these brands to then shift pricing or terms after building a customer base. Similarly, established cable and telecom providers sometimes use penetration pricing for new offerings or to entice customers with add-ons. This can include a reduced price for multiple channels, phone lines, or internet access for a limited time, making the service more appealing to try.

Sometimes, well-established brands attempt to play in a new space. Even with brand recognition, these companies may choose to employ penetration pricing at launch to compete with lower-priced options.

Here's an example: A well-known ridesharing giant first entered the market trying to compete with taxis, whose final costs were uncertain and often depended on traffic patterns at any given moment. The company initially disrupted the market by offering a fixed price up front and cashless payment options. Over time, the brand's prices increased to about the same as a cab fare, and they now accept cash.

Companies implementing penetration pricing often combine the strategy with quote-to-cash systems to manage complex pricing transitions efficiently.

Several strategic advantages make penetration pricing effective beyond customer acquisition:

• Attention in the market: Low pricing creates buzz — similar to a flash sale — and once you capture customers' attention, you can generate word-of-mouth marketing, producing organic awareness that would otherwise require advertising spend.
• Competitive pressure: Aggressive pricing disrupts the market, potentially affecting competitors' pricing strategies and profits. It also compels established companies to respond defensively instead of prioritizing innovation and growth.
• Inventory turnover: Competitive pricing speeds up product movement, reducing inventory holding costs and improving cash flow cycles.
• Customer data collection: Rapid customer acquisition provides behavioral data and valuable feedback that can help you improve your product offering and future sales forecasting.
• Partnership opportunities: Large customer bases draw partnership opportunities and supplier negotiations, improving overall business positioning — potentially further expanding your customer base through partnerships.

While pricing decisions are cross-functional, sales AI can help optimize competitive moves by analyzing market responses in real time and optimizing pricing transitions.

Penetration pricing can also present some challenges:

• Pressure on profitability: Low pricing can cut into operating income, straining cash flow and delaying profitability. This can be problematic for startups with limited funding.
• Risk of competitive price wars: Overly aggressive pricing may trigger competitive responses, leading to a race to the bottom across the industry that's harmful for all involved.
• Customer expectations: Loyal customers may feel misled if they don't see how you're continually improving the offering as your prices stabilize. Essentially, those attracted by low prices can be quicker to churn, but price sensitivity analysis helps determine the best timing for adjustments.
• Quality perception: Lower prices might suggest lower quality, so it's important to balance affordability with a compelling value proposition. You don't want to risk undermining brand positioning or restricting premium pricing opportunities. 
• Operational strain: Rapid customer acquisition can overwhelm operational capacity, causing service quality issues that harm customer relationships. However, modern cloud-based sales technology can help sellers better understand customer experiences.

Consider a few different pricing strategy examples before making final pricing decisions:

Penetration pricing is similar to loss leader pricing in that customers enjoy low prices while a product is new to the market. Loss leading is a strategy of selling a product or service at a loss to increase your customer base, which can sometimes be seen as predatory. In contrast, penetration pricing generally sets a price point for products that covers the costs.

• When to use: When first entering the market, retailers sometimes use this strategy, especially if they can give away or sell a product initially at a low price but rely on sales of replacement parts or other related components. For example, a new razor may be priced low, but the blades or shaving cream are priced more competitively.

This is when companies start with a higher price point, often due to existing product demand, then gradually lower the price to reach more price-sensitive customers. Companies aim to achieve both short-term profits and long-term sustainability. A potential downside of price skimming is that competitors can undercut your higher price point and make a dent in your market share.

• When to use: When a new product enters the market and you have a customer base that is prone to early adoption and willing to pay premium prices, these customers may enjoy being among the first to try or own a product. This strategy can also be a safe bet if you already have a list of customers waiting for the product's release.

Here, the price point isn't based on how much it costs to produce something or provide a service. Instead, the price is set according to what the business believes a customer is willing to pay. A value-based pricing strategy works best for established brands that already have a reputation for quality. Brand reputation allows the company to price new products higher from the outset and then gauge customer response.

• When to use: Companies offering a well-made, differentiated, or unique product may be able to use this pricing model — provided they've done research and have customer proof. Part of perceived value includes how customers look and feel, or may be perceived by others, when using the product or service. This can also be an option when selling replacement parts for a specific product.

In this case, companies offer a free or limited version of their product and charge for add-on features or services. The eventual goal is to upgrade the customer to a paid subscription or an enhanced version of the product. Many SaaS B2B startups offer free, stripped-down versions of their software to allow for experimentation. As customers become reliant on the tool, there's a strong case for upselling.

• When to use: If you can offer a basic version of your product with limited customer service, then freemium pricing is a great option. It's also important to have a premium version of the product available to justify the eventual cost. Startups often use this pricing model when they enter a market. Still, many companies continue to offer both free and paid versions of their products over time as a longer-term customer acquisition strategy.

Successful market penetration requires careful planning and execution. Here are some best practices to follow:

• Identify target market segments: Conduct thorough market research to identify the segments most likely to respond positively to a lower price. Target early adopters and price-sensitive customers who can help generate word-of-mouth and initial traction. Use sales analytics software to analyze customer behavior patterns and identify optimal targeting criteria.
• Set prices competitively: Set initial prices low enough to attract attention, but keep your eye on short-term sustainability. Prices should cover variable costs and contribute to fixed expenses, avoiding unsustainable losses. Competitive pricing analysis helps identify the best price points.
• Adjust over time: Implement gradual price increases as your market position grows stronger. Monitor customer response and competitor reactions to optimize timing and size of adjustments. Use marginal analysis to assess how price changes affect profitability.
• Review key metrics: You'll need to track customer acquisition rates, retention levels, market share growth, and profitability metrics. Regular reviews ensure you can make timely adjustments to your strategy.
• Use analysis tools: Analytics platforms help track performance and inform decision-making. Solutions like Revenue Cloud provide integrated tools for pricing optimization and tracking performance throughout the entire quote-to-cash process.
• Stay agile and iterate: Stay flexible. You'll need to adjust your strategies based on market conditions. Establish regular reviews with decision makers to stay aligned with business goals.

Sometimes, you need to create your own opportunity for exposure — and penetration pricing can help. While it may feel risky to enter the market at a low price, it's often worthwhile. But before applying this pricing strategy, consider whether the conditions are well-suited for your business and whether you have the right technology in place to measure and adjust pricing post-launch. Modern revenue management platforms eliminate guesswork by offering real-time insights into pricing effectiveness and customer response. It's also vital to have tools in place to gauge whether your penetration pricing strategy is effectively increasing your market share.