Penetration Pricing: Capturing market share through competitive pricing
6min • Mar 14, 2025 • Last updated on Mar 17, 2025
Olivier Renard
Content & SEO Manager
€2/month. In 2012, Free Mobile disrupted the French telecom market by launching a low-cost mobile plan, shaking up the industry with an aggressive pricing model. “And we’re still making a profit!” declared its CEO, Xavier Niel, forcing established operators to revise their offers.
This bold pricing move, supported by precise marketing execution, is a textbook example of a penetration pricing strategy.
Key takeaways:
Penetration pricing is a strategy used to enter a market quickly and attract a large customer base by setting low initial prices.
It contrasts with price skimming, where companies start with high prices to maximise early profitability.
This approach relies on multiple factors: aggressive pricing, precise targeting, efficient distribution, and wide-reaching communication.
However, penetration pricing carries risks, such as lower profit margins and the challenge of increasing prices later without losing customers. There are various ways for a company to penetrate a market.
🔎 What is penetration pricing, and how does it work? Discover its advantages, risks, and key tactics for successful implementation. 🚀
What is penetration pricing?
Penetration pricing aims to quickly attract a large customer base by offering an initial low price for a product or service.
The goal is to gain market share and build a loyal customer base before gradually increasing prices.
This strategy capitalises on volume: by attracting more customers, the company compensates for lower margins through higher sales volumes.
It is widely used in highly competitive markets, where price plays a crucial role in purchase decisions. This approach is particularly effective in sectors such as retail, telecoms, streaming services, and consumer electronics.
💡 Notable examples:
Disney+ launched at $6.99/month in 2019—significantly lower than Netflix’s $12.99/month. This pricing strategy helped Disney+ acquire 10 million subscribers on its first day.
Xiaomi challenged Apple and Samsung in 2014 by launching the Mi 4 at $300—roughly half the price of iPhones (Apple) and Galaxy models (Samsung). This approach fuelled Xiaomi’s rapid growth across Asia and Europe
Disney+ US launch (source: Disney)
Contrasting with price skimming
Penetration pricing is the opposite of price skimming, which takes a high-pricing approach. Instead of setting low prices, companies launch with premium pricing to maximise early profits and recover investment costs quickly.
💡 This approach is common in luxury, high-tech, and innovative sectors, with brands such as Apple, Tesla, and Nespresso employing price skimming to reinforce their premium image.
Other pricing strategies also exist, such as price matching, freemium models, and dynamic pricing.
How to implement an effective penetration pricing strategy
Objective: Rapid customer acquisition
Price is the primary driver of penetration pricing. A low initial price helps attract consumers and lower purchase barriers.
By reducing price sensitivity, businesses can quickly capture market share and build a loyal customer base.
The strategy relies on high sales volume: selling more products compensates for lower margins and benefits from economies of scale. However, pricing too low may devalue the product or impact long-term profitability.
Setting the right price requires careful calibration based on cost structure and future pricing strategy.
Defining a structured action plan
A successful penetration pricing strategy requires a structured plan. Here are the essential steps:
1️⃣ Analyse the market and identify target segments
What are customer expectations?
How is the competition positioned?
Which customer segments are most sensitive to price changes?
2️⃣ Develop a clear and compelling market positioning
What unique selling point (USP) will differentiate your brand?
How can the message be crafted to capture attention effectively?
3️⃣ Plan marketing and sales actions
Which marketing channels (advertising, digital, influencers) will effectively reach the target audience?
What distribution strategy will maximise accessibility?
4️⃣ Track performance and adjust the strategy accordingly
Which KPIs should be monitored (sales, market penetration rate, conversion rate)?
How should pricing, communication, and distribution be adjusted based on market feedback?
Penetration pricing strategy
Combining multiple levers for maximum impact
Penetration pricing focuses on the first “P” of the marketing mix: Price. However, its success depends on all 7Ps.
Product: Meet market demand, simplify offerings, and make innovation accessible to maximise appeal.
Promotion: Limited offers, launch discounts, free trials to create a sense of urgency and encourage purchase.
Place: Multi-channel strategy, e-commerce platforms, rapid implementation in strategic points of sale to maximise visibility.
People: Training sales and customer service teams to support new users and optimise the buying experience.
Processus : Simplify customer journeys with a seamless shopping experience, efficient logistics and responsive after-sales service.
Physical evidence: Build trust through customer reviews, product demonstrations, premium packaging, and careful branding.
Advantages and risks
This strategy has its advantages, but there are also risks to be anticipated. Here are the key points to bear in mind.
Advantages | Risks |
|---|---|
Rapid acquisition of market share: Aggressive pricing attracts a large number of customers from the outset. | Lower short-term profit margins: Prices are set below market average. |
Barriers to entry for competitors: A well-established brand discourages new entrants. | Difficulty in raising prices: Raising prices too quickly can lead to a loss of customers. |
Volume effect and economies of scale: Higher sales volume reduces costs per unit. | Price-driven customer loyalty: Consumers may switch brands for a better deal, which can impact retention. |
Psychological effect and rapid brand awareness: A shock price creates buzz and improves visibility in a competitive market. | Risk of price wars: An aggressive response from competitors can harm overall market profitability. |
Advantages and risks of penetration pricing
💡 In the airline industry, EasyJet and Ryanair are waging a fierce battle over ticket prices. Whenever one reduces fares, the other follows suit to avoid losing customers. Fare-sensitive travellers are quick to switch airlines in response to promotions.
Ryanair vs easyJet
Although it can be effective in many cases, there are situations where a price penetration policy is not appropriate:
High-end or luxury products
Niche markets with limited demand
Production costs that are too high
Business models based on long-term profitability
Competition capable of aligning its prices quickly
Going beyond: other levers and practical applications
Other ways of entering a market
Although low pricing is a powerful lever, other strategies can effectively penetrate a market. These include:
Product innovation: Introduce breakthrough technology or a unique feature to stand out and attract consumers (e.g., Tesla).
Partnerships and co-branding: Collaborate with content creators or another brand to generate interest and create a viral effect around your product.
Geographical expansion and phygital strategy: Adopt a truly omnichannel approach to reach as many customers as possible (e-commerce, marketplaces, physical stores).
Acquiring a competitor: Buying an established player enables market penetration without starting from scratch (e.g., Facebook and WhatsApp).
Superior customer experience: Offering seamless, responsive, and differentiated service can convince consumers to switch to a new brand (e.g., Amazon, Uber).
KPIs to track
The success of a penetration pricing strategy is measured through key performance indicators (KPIs):
Market penetration rate
The market penetration rate measures the proportion of customers acquired by a company relative to the total market size. It helps assess the effectiveness of an expansion strategy and identifies remaining growth potential.
Market penetration rate formula :
Market penetration rate formula
A high penetration rate indicates that the company has already captured a significant market share. A low rate suggests strong growth potential remains.
Customer acquisition cost (CAC)
The CAC measures the investment required to attract a new customer. It is calculated by dividing total marketing and sales expenses by the number of new customers acquired over a given period.
Retention rate
The retention rate measures a company’s ability to retain customers after acquisition.
Retention Rate = (Final Customers - New Customers) / Initial Customers * 100
Revenue growth
Revenue progression helps evaluate the impact of the penetration pricing strategy and determines whether growth is sustainable and profitable. While an increase in sales is positive, it must be considered alongside profitability to avoid uncontrolled expansion.
Key indicators to track:
Revenue variation
Gross margin
Customer Lifetime Value (CLV) / Customer Acquisition Cost (CAC) ratio
The impact of a CDP in an omnichannel market
A penetration pricing strategy is particularly suited to competitive markets with high demand. In such environments, customer acquisition relies on competitive pricing, wide distribution, and personalised user experiences. Data-driven marketing plays a central role in this approach.
Leverage your customer data with DinMo
In an omnichannel approach, customer data mastery is a key lever. A Customer Data Platform (CDP) helps unify, segment, and activate customer data to maximise the impact of a penetration strategy.
The goal? Deliver the right message to the right person, on the right channel, at the right time.
✅ Optimal channel selection: Our AI identifies the most suitable channel to deliver the best experience.
✅ Advanced segmentation: Precisely target consumers most receptive to launch offers.
✅ Campaign optimisation: Define the Next Best Offer (NBO) and determine the right timing for promotions.
Conclusion
The penetration pricing strategy is based on attractive pricing and wide distribution, enabling rapid market share acquisition.
Its effectiveness depends on the target market's receptiveness and the company’s execution. It requires careful monitoring of key performance indicators.
DinMo’s Customer Data Platform enhances this strategy through greater personalisation and better performance monitoring. Contact us today to boost your sales and marketing performance!
