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Estd 4.22.2023
The short answer is that a deliberately low initial price can be a viable strategy to gain market share, but it does come with challenges when it comes time to raise prices.
Here’s how our SaaS pricing book, Price to Scale, frames the issue:
• In our book we point out that early-stage companies—like Amplitude in its early days—often set lower prices because they’re new entrants. At that point, fewer feature differentiators and a lighter brand cache can make a lower price necessary to attract customers. (See the Price Evolution section.)
• The strategy of penetration pricing is effective for quickly capturing the market, especially if your business model (such as a bottom-up SaaS approach) depends on large-scale user adoption and even virality. Our book highlights that pricing at the lower end of the range can be useful to maximize market share. (Reference from Page 93.)
• However, the book also emphasizes that once you’ve established a reputation for a low price, there is a risk of increased price sensitivity. When it comes time to raise prices or introduce differentiated tiers, customers may resist paying more if they have become accustomed to the lower rate. Hence, managing that transition becomes a critical challenge.
In practice, if you choose penetration pricing, it’s essential to have a clear roadmap for adding value over time (through enhanced features, additional services, or improved performance) so you can justify any price increases later. The key is to ensure that customers see a tangible benefit that aligns with the higher price point.
In summary, using a low initial price can be a strategic choice to build your market presence, but it requires a disciplined approach to evolution in pricing strategy to avoid being locked into a low-price perception. Always weigh the immediate benefits of market share against the long-term goal of revenue optimization as discussed in our book Price to Scale.