How Disney use the Penetration Pricing Strategy

Summary

Penetration pricing is a strategy where companies set low initial prices to quickly gain market share and establish brand loyalty. Disney Plus used this tactic when entering the competitive UK streaming market, offering a low monthly fee to attract customers. After gaining a solid customer base, Disney gradually raised its prices, hoping that strong content would keep subscribers loyal. Research shows that companies using penetration pricing can experience faster market share growth and better customer retention, making it an effective strategy for businesses looking to compete in crowded markets.

Takeaways

• 😀 Penetration pricing is a strategy where businesses set initial prices low to gain market share quickly.
• 😀 The goal of penetration pricing is to attract new customers and build brand recognition in competitive markets.
• 😀 Disney Plus used penetration pricing when launching in the UK streaming market in 2020, offering a low fee of £5.99 to compete with Netflix and Amazon Prime.
• 😀 By underpricing competitors like Netflix (£8.99) and Amazon Prime (£7.99), Disney Plus successfully gained market share.
• 😀 Once Disney Plus attracted new customers, they gradually increased prices, from £5.99 to £7.99 and later to £10.99.
• 😀 Companies must understand their target market's price sensitivity to avoid losing customers when prices rise.
• 😀 Penetration pricing can lead to fast market share growth and increased customer retention, with studies showing up to 2.5x faster growth.
• 😀 Successful use of penetration pricing depends on providing valuable content or services to retain customers after price hikes.
• 😀 Disney Plus aimed to maintain customer loyalty by offering quality content once prices rose to match competitors.
• 😀 Penetration pricing is particularly effective in crowded or competitive markets where gaining market share quickly is critical.
• 😀 The strategy is not sustainable long-term unless businesses plan how to gradually increase prices and maintain customer interest.

Q & A

What is penetration pricing?

Penetration pricing is a strategy where a business sets its initial price very low to quickly gain market share and attract customers to try the product or service. Once a customer base is established, the price is gradually increased.

How did Disney use penetration pricing for Disney Plus in 2020?

In 2020, Disney used penetration pricing by offering a low introductory fee of 5.99 per month for Disney Plus, alongside a free trial. This was significantly lower than competitors like Netflix and Amazon Prime, helping Disney Plus gain a foothold in the competitive UK streaming market.

Why is penetration pricing effective in competitive markets?

Penetration pricing is effective in competitive markets because it allows a new business or product to quickly attract customers by offering a better deal than established competitors, making it easier for customers to try the product or service.

What challenge does Disney face after raising its prices from the initial low offer?

After raising the price, Disney faces the challenge of retaining customers who were initially attracted by the low price. To prevent customer churn, they need to offer high-quality content that justifies the higher price.

How did Disney Plus adjust its pricing after initial success?

After the successful launch with penetration pricing, Disney Plus gradually increased its price from 5.99 to 7.99 per month and planned a further increase to 10.99 per month in 2023, bringing their prices closer in line with competitors like Netflix.

What is the risk of using penetration pricing?

The main risk of penetration pricing is that businesses may get stuck in a low-price trap. If they can't raise prices without losing customers, they might fail to generate sufficient profit to sustain the business in the long term.

How does a business know if penetration pricing will work for them?

A business needs to have a clear understanding of its target market's price sensitivity. If the target audience is highly price-sensitive, they may leave when prices rise. Additionally, the business must plan for price increases and ensure ongoing value to retain customers.

What did the Accenture study reveal about penetration pricing?

The Accenture study found that companies using penetration pricing experienced 2.5 times faster growth in market share compared to those that did not use this pricing strategy, demonstrating its effectiveness in gaining a competitive advantage.

How did penetration pricing affect customer retention according to McKinsey & Co.?

According to a study by McKinsey & Co., penetration pricing resulted in an 8% increase in sales growth and a 7% improvement in customer retention, indicating its positive impact on both customer acquisition and long-term loyalty.

What does Disney rely on to keep customers after increasing prices?

Disney relies on offering high-quality content to maintain customer loyalty after increasing prices. They aim to ensure that the value of the service remains strong enough to justify the higher subscription fees.