Penetration pricing is a pricing strategy used by businesses to gain market share by offering a product or service at a lower price than competitors. The goal of penetration pricing is to attract customers who are price-sensitive and willing to switch from their current provider to the new one offering a lower price. This strategy is particularly effective in competitive markets where customers have many options to choose from.
Learn more by watching the video and reading the blog post below:
In today's highly competitive business environment, companies are constantly seeking innovative ways to gain an edge over their rivals. One pricing strategy that many businesses use to achieve this is called penetration pricing.
What is penetration pricing?
Penetration pricing is a pricing strategy that involves offering a product or service at a lower price than competitors in order to attract price-sensitive customers. This approach is particularly effective in crowded markets where customers have numerous options to choose from. The goal of penetration pricing is to gain market share quickly by attracting customers who are willing to switch from their current provider to the new one offering a lower price.
How Uber used penetration pricing
One business that has successfully employed penetration pricing to disrupt the market is the ride-sharing giant, Uber. When Uber first launched, they offered significantly lower prices than traditional taxi companies. This strategy allowed them to quickly gain a significant market share and attract a vast customer base.
Uber's penetration pricing strategy was based on leveraging technology to connect riders with drivers efficiently. By eliminating the need for traditional taxi dispatch systems, Uber was able to reduce costs and offer lower prices while still maintaining profitability. In addition, Uber incentivised drivers to work for them by offering them flexible schedules and the opportunity to earn more money.
By offering lower prices and a better user experience, Uber was able to quickly gain market share and disrupt the taxi industry. This forced traditional taxi companies to adapt and offer their own ride-sharing services at competitive prices.
Negatives of penetration pricing
While penetration pricing can be an effective tool for businesses to gain market share and attract price-sensitive customers, it is not without risks. If a business sets its prices too low, it may struggle to cover its costs and could even go out of business. Additionally, competitors may respond by lowering their own prices, which could lead to a price war and reduced profits for all players.
In conclusion, penetration pricing can be a powerful strategy for businesses to gain market share and attract price-sensitive customers. Uber's successful use of this strategy is a fantastic example of how a company can disrupt an industry and become a dominant player by offering a better product at a lower price.
To see how Disney used penetration pricing watch the video above.