Penetration Pricing

• Offer a product at a very low introductory price

• Aim to:

  • Gain market share quickly

  • Build customer usage and loyalty

  • Build sales of higher-priced related items

• The opposite of price skimming as a pricing strategy for entering new markets

Will 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

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