Penetration Pricing

What is penetration pricing?

Offer a product at a very low introductory price

What are the aims of penetration pricing?

• Gain market share quickly

• Build customer usage and loyalty

• Build sales of higher-priced related items

Why is it used as instead of price skimming?

They use it as a pricing strategy for entering new markets

Why does penetration pricing work?

• It is a low-price strategy, so demand in the market must be highly price-sensitive (elastic)

• Increase in sales and market share need to generate lower unit costs (economies of scale) to make the lower prices profitable

• Prices need to be kept low to deter competition using a similar strategy

What are the possible drawbacks of penetration pricing?

• The low initial price can create an expectation of permanently low prices amongst customers who switch

• Penetration pricing may simply attract customers who are looking for a bargain, rather than customers who will become loyal to the business and its brand (repeat business)

• The strategy is likely to result in retaliation from established competitors, who will try to maintain their market share