Penetration Pricing Risks: Why Cheap Can Sink You.
Penetration pricing risks grow when you cannot afford to lose money while the strategy works. Low prices do win sometimes, but mostly for firms with deep reserves. So for a founder with no capital, cheap pricing can simply be a slower path to failure.
The case for going cheap.
The famous line is "your margin is my opportunity", usually credited to Jeff Bezos. However, its earliest known source is a Fortune article from November 2012 by Adam Lashinsky. It appears in none of Bezos's shareholder letters. Still, the strategy is real: Amazon, Costco, Ryanair and Gillette all built businesses on thin margins.
The penetration pricing risks for a founder without capital.
In South Africa, Xpresso Café priced everything at ten rand for five years, then moved to twelve and fourteen. But most companies on that list could absorb losses for years. Because no study was found on firms without that cushion, a low price strategy small business owners copy is a bet on outlasting pain.
The objection worth hearing in full.
The strongest objection is not about capital. Often the real problem is ignorance rather than courage. Many founders do not know what the market will bear or what their value is. Therefore raising a price without fixing that does not fix the business. Instead, it only makes failure more expensive.
Weigh penetration pricing risks before you cut.
Write how many months you could survive selling at your lowest considered price.
Then list three things you do not yet know about what buyers value.
From the book.
Telling a first-time founder to charge more assumes the problem is courage. Often it is ignorance. They do not know what the market will bear, they cannot articulate their value, and they do not actually know whether what they deliver justifies a higher number. Raising the price without fixing any of that does not fix the business. It makes it more expensive to fail.
I Want to Start a Business but I Don't Have Money, chapter 7: Why you will price too low
Questions about penetration pricing risks.
What are the main penetration pricing risks for a new founder?
You need money to survive losses while low prices build volume. Without that cushion, the strategy can end in bankruptcy.
Did Jeff Bezos really say your margin is my opportunity?
Its earliest source is a 2012 Fortune article calling it his favourite aphorism. So it may be his, a paraphrase, or neither.
Is raising prices always the answer?
No, since the deeper problem is often not knowing your value. Raising prices without fixing that makes failure more expensive.
Read the whole chapter.
This lesson covers one section of chapter 7, “Why you will price too low”. The book goes further, with the full evidence, the stories and every exercise.
Lessons in this chapter.
- 01 Why Freelancers Undercharge: The Number Comes From You.
- 02 Anchoring Effect Experiment: Your Cost Is the Wheel.
- 03 Price Placebo Effect: What the Evidence Really Shows.
- 04 Penetration Pricing Risks: Why Cheap Can Sink You.
- 05 Water Diamond Paradox: Cost Is Not the Buyer's Value.
- 06 When to Raise Your Prices: The Cost of Waiting.
- 07 Gabor Granger Method: Test a Higher Price Tonight.
- 08 What Your Price Says About You: Read It Cold.