When launching a business or new product, a penetration pricing strategy of super-low prices can successfully build a customer base very quickly. After grabbing a foothold in the market, you can then raise prices to more sustainable levels.
Except, you don’t want to be too successful in the low-price land-grab. The absurd case of MoviePass’ failure in September 2019 highlights the risks.
MoviePass’ value proposition was for members to be able to visit a movie theatre once a day for a monthly fee of only $14.95. When regular ticket prices ranged from $16 to $19, it was a compelling offer.
What’s in it for the cinemas? In case you didn’t notice, cinemas make their money from their (exorbitant) margins on snack bar sales.
For a while, membership grew steadily. But then new owners of MoviePass decided they wanted to rapidly grow the few thousand members to 100,000. They dropped the monthly membership fee to about $10.
Within 3 days, membership exploded to 150,000. The rapid rise overloaded the servers and users were unable to book and redeem their tickets.
Further up the supply chain, the credit card company issuing the membership cards couldn’t churn out more than 30,000 cards per month. Some members waited months for their cards. A cornucopia of related maladies ensued.
Surprisingly, despite the negative publicity, MoviePass managed to keep most members and limped along for several months.
The business model was built on the typical model of discounted gym membership. If most members under-utilise the service, their revenues would cover the costs of the few high-utilisation members.
But fun fact: most people like going to movies much, much more than they like going to gym. There weren’t enough low-use members and the gym model didn’t apply.
Ultimately, MoviePass was under-resourced and out of cash. With a plethora of other questionable decisions, it closed abruptly. (The Verge, 19 Sep. 2019)
The key lesson is to test your strategies with a limited segment of your market to validate your models.
Penetration pricing is a well-proven strategy, but you need more than hopes and dreams to turn it into long-term success.