Two examples of penetration pricing
Penetration pricing is a popular tactic in the business-to-consumer (B2C) market. The competitive nature of these products and the sheer number of choices most consumers have make it difficult to gain a footing in a new market without a strong acquisition strategy.
The streaming entertainment market is one of the most difficult spaces for new companies to enter. Established brands like Netflix and Hulu have serious brand recognition and a loyal customer base. So, when Disney+ decided to launch its own streaming platform at the end of 2019, it decided that penetration pricing was its best shot.
As we saw in our Pricing Page Teardown on Netflix and Disney+, Disney’s initial offering of $6.99 is well under its customers’ willingness to pay.
Monthly willingness to pay for Netflix and Disney+.
Instead of making people choose which streaming service to go with, Disney+ priced itself aggressively low to entice new customers to buy their service while also keeping Netflix. If it had priced itself closer to Netflix at launch, it could have increased its average revenue per acquisition (ARPA), but it would not have been able to build its customer base as fast.
It will be interesting to see how this changes in the months to come as Disney+ establishes its place in the market and starts raising prices.
Cable and internet service providers
The ongoing battle between cable companies and ISPs like Comcast and Verizon uses some textbook examples of penetration pricing. Each company goes after their competitions’ customer base by offering an outrageously low introductory price that includes significant discounts or free upgrades (like HBO or Starz) and bundles together phone, internet, and TV packages.
After an initial 6- or 12-month introductory offer, customers will see their upgrades disappear and their subscription fees increase. Companies like Cricket Wireless and T-Mobile are also throwing their hats into the ring to try and upset the balance of power between the two largest providers.
This kind of rampant competition is what can make penetration pricing so attractive to new businesses.