Penetration pricing in SaaS: risks, challenges, and pro tips
Penetration pricing sounds like a no-brainer for new businesses: come in with the lowest price, attract customers, raise the price later, and watch your revenue grow.
As simple as that. Or is it?
Let’s break down what penetration pricing really is, the pitfalls it can bring, and how to use it the right way.
What is penetration pricing?
Penetration pricing is a strategy where a SaaS company introduces a new product at a lower price than competitors to quickly gain market share.
The idea is to attract early adopters with lower costs, then gradually increase the price as the product gains traction and customer loyalty. It’s a strategy that helps new companies break into a competitive space.
Penetration pricing vs competitive pricing
It’s easy to mix up penetration pricing and competitive pricing since both strategies aim to attract customers with appealing rates.
So, before we dig any deeper, let’s clear up the confusion.
When a company just lowers its price or tweaks specific packages to look better than the competition, that’s competitive pricing. Penetration pricing means setting your price significantly lower than competitors—no ifs or buts—often at the cost of short-term profits.
But the main difference lies in the intent and how long each strategy lasts. Penetration pricing is an aggressive tactic that focuses on gaining market share fast. Competitive pricing is more about balance. Companies using this approach typically adjust their prices based on what others in the market are doing, ensuring they remain competitive without hurting their bottom line.
Penetration pricing example
A great example of penetration pricing is unfolding right before us—we’re talking OpenAI.
When OpenAI first introduced ChatGPT, it offered free access to the general public and a paid plan—ChatGPT Plus—unlocking advanced features and faster performance for a relatively low monthly fee of $20/month. The value of the product far exceeds what users pay for it, and it’s safe to say that a price hike is on the horizon.
With this strategy, the company has already set a record for the fastest-growing user base, with 200 million people using the AI chatbot every week.
The challenges and risks of using penetration pricing
Attracting millions of users that fast is exciting, but this strategy has its downsides.
Little-to-no profit margin
Using penetration pricing means operating at slim or even negative profit margins for quite some time.
Now that we’ve talked about OpenAI’s penetration pricing strategy, let’s look at how it plays out for the company financially. In 2024 alone, OpenAI saw roughly $5 billion in losses on $3.7 billion in revenue. On top of that, the company isn’t projected to turn a profit until 2029.
While SaaS companies not backed by Microsoft couldn’t sustain such significant losses, OpenAI’s situation perfectly illustrates the point. If you want to enjoy the long-term benefits of penetration pricing, you need to be prepared for a period of low profits—or even losses—until you gain market share and can raise your prices.
Undervaluing the product
Ever come across a product priced much lower than other options and think, “What’s wrong with it?”
This is exactly what might happen when you launch at a lower price point.
Customers might start seeing your offering as less valuable compared to others, and that perception can stick around, even after you raise your prices.
As you set up your penetration pricing model, you’ll need to think about how you can position your product to maintain its perceived value. We’ll go over some ideas for that later in the article.
Difficulty retaining revenue
When making a splash with penetration pricing, you’ll need to put in extra effort to keep those customers around.
First off, if users joined only because of a low price, they might jump ship just as easily when a competitor offers a better deal or features. That initial bargain creates a situation where you attract customers that are always looking for the next low-cost option, which makes it hard to build loyalty.
But the real problem arises when you finally increase your rates. All those price-sensitive customers may not be willing to stay once prices go up—so it’ll take proactive steps to minimize churn and keep as many of your initial users as you can.
💡 ChartMogul makes it easy to keep tabs on user retention and see how your penetration pricing strategy impacts long-term revenue.
Using customer retention cohort analysis, you can track the percentage or number of customers from a specific group who still have active subscriptions over time. This gives you a clear view of how many users drawn in by the initial low price have stayed, helping you gauge the strategy’s true effectiveness.
Audience backlash
Nobody enjoys it when companies hike up their prices, no matter how far along they are in their growth journey.
Take Bubble, for example. This popular no-code app-building software found itself in the midst of a heated pricing debate after raising its costs over a year ago. Users took to Reddit to voice their frustrations, and many even switched to cheaper app builders as a reaction to the price hike.
Source
Now, imagine updating your pricing without the kind of loyalty that a well-established brand like Bubble has. You can expect a lot more complaints and pushback when you increase your rates, especially from those who joined because of the initial low rates.
Do you need penetration pricing?
The answer depends on your exact situation.
For instance, it’s common knowledge that you don’t need penetration pricing when you have a unique offer—after all, if there’s no real competition, you don’t need to entice users with a low price. But if we look at OpenAI’s approach, it flips that logic on its head. By offering AI integration at a low price, they’re basically “hooking” businesses. Once AI becomes an integral part of their operations, even if prices rise, most companies will choose to stay rather than make a switch and rebuild their workflows.
In fact, it’s easier to say when penetration pricing might not be the right fit. Here’s when you should think twice:
High-ticket sales
If your products or services are high-ticket items, you’re likely dealing with less price-sensitive customers. Your customers may prioritize quality and value over a low price. Using penetration pricing could undermine the perceived value of your offering and may not attract the right type of customer.
Saturated markets
“Wait, isn’t penetration pricing the go-to strategy for entering established, commoditized markets?”
Well, it can be, but it really depends on the situation.
In markets where products are nearly identical, penetration pricing can quickly turn into a race to the bottom. If your offering doesn’t stand out with something noticeably better or unique, you’ll just end up being seen as another cheap option. That means lower margins and little customer loyalty, which can be a tough spot to recover from.
Limited budgets
This one’s pretty obvious. If you don’t have the resources to sustain the lack of revenue growth or potential losses for six months to two years, penetration pricing isn’t the strategy for you.
Micro niches
Like with saturated markets, penetration pricing may or may not work in micro niches, depending on the situation. But generally, users in micro niches tend to stick to their software providers for ages, and a lower price point isn’t enough to sway them away from their trusted, legacy solutions.
It’s less about price and more about functionality, support, and reliability in such specialized markets. Unless your product offers something significantly better, cheaper pricing won’t be a strong enough pull to get them to switch.
Plus, micro niches are limited in size, making penetration pricing simply unsustainable. The strategy works best when there’s room to scale once you’ve gained traction.
Implementing a penetration pricing strategy
Penetration pricing isn’t for everyone, but it’s tough to know if it’s right for you until you try it.
How low is too low?
You want a price point that attracts customers but doesn’t raise any red flags. Setting your price too low can backfire in a few ways:
- Potential customers may doubt the quality of your product.
- You might pull in customers who can’t afford your product in the long run.
- Positioning yourself as a low-cost option can create a lasting reputation that’s hard to shake.
So, how do you set the right price and avoid all of these?
The best way is to talk to your target audience. Gather a focus group of people who fit your ideal customer profile (ICP) and show them your product. Once they understand the value, you can use a modified version of the Van Westendorp model to gather their opinions on pricing.
The Van Westendorp model uses four questions to identify a range of acceptable prices that align with customer price perceptions and expectations. While it’s typically used to find a standard market price for a product, you can use the two key questions from this framework to figure out your penetration price:
- At what price would you doubt the quality of this product?
- At what price does this seem like a good deal?
Through the responses to these questions, you can find a penetration price that strikes the right balance—drawing in users without compromising your brand’s integrity.
Price is just one aspect to take care of
There’s a reason there’s “strategy” in “penetration pricing strategy”—because it’s not just about the price.
Aside from defining the price, you’ve got to work on your strategy so you set it for long-term success from the very beginning until after you weave your low price.
You’ve got to set the timeline for your penetration price, develop your messaging around it to set the right expectations with your customers, and define what happens when it’s time to implement the full price.
Messaging
Consider communicating to your customers why your price is low without raising any doubts about the quality of your product. You may frame your low price as an introductory offer or a special promotion.
By letting customers know that this isn’t the usual price, you also create a sense of urgency and exclusivity—which can boost sales even more.
Timeline
How will you know it’s time to transition to your regular pricing?
Start by setting specific user acquisition targets to hit with your penetration pricing, but don’t stop there. Keep an eye on your retention metrics as you work toward these goals.
If you notice persistent retention issues, it might mean your low price is drawing in the wrong crowd or that your retention efforts need a boost.
If it’s the first case, it’s best to step back from your penetration pricing strategy before you hit those acquisition targets—it isn’t going to deliver the value you’re aiming for. But before jumping to conclusions about the audience, make sure you’ve done all you could to retain them.
“At Artisan, we started with product-led growth (PLG) and entered the market with really cheap pricing. It was great initially because we got hundreds of users who were willing to sign up and try us immediately.
However, over time, we realized it wasn’t the right strategy for us because we were attracting the wrong target audience—it was a lot of really early startups and small businesses that didn’t have product-market fit (PMF), and so they inevitably didn’t get any results on our platform for outbound sales.
After pivoting to a sales-led model where we increased our prices and offered a custom contract, we were able to steadily build revenue, attract serious customers, and get to where we are today with $2M in ARR!”
Tina Sang, Chief of Staff at Artisan
Retention efforts
As you build up your customer base, you should pay special attention to product adoption. When users get your product at a bargain price, they might forget about it because we often undervalue things that come cheap. And this means they’ll probably stop paying for it once the price goes up.
To prevent this, focus on helping new users reach their “aha!” moment with your product. You can do this by offering onboarding workflows, one-on-one account support, and ongoing in-app guidance to keep them engaged.
Exit strategy
When the time comes to exit your penetration pricing, plan for gradual price increases as your product gains traction. This way, you can improve profitability without alienating customers.
It’s also a good idea to raise prices only for new users while allowing current customers to keep their rate for as long as they stay with you—or for a set period, like a year.
Just remember, success with penetration pricing goes beyond just setting a low price. You’ll need a clear plan to transition to regular pricing without losing customers, strategic messaging to communicate the value of your offer, and a solid retention strategy to keep users engaged even after prices go up.
ChartMogul will help you track key metrics like Net and Gross Revenue Retention to gauge how your initial pricing impacts long-term revenue. With the data at hand, you’ll see if penetration pricing is paying off or if it’s time to pivot.
