Overview of Penetration Pricing

Definition of
Penetration Pricing

Professor A defines Penetration Pricing strategy.

What is Penetration Pricing? Penetration Pricing is a pricing strategy used by businesses to attract customers to a new product or service by offering a significantly lower price during its initial launch phase. The primary goal of penetration pricing is to rapidly gain market share, build a customer base, and create brand awareness. Once a strong market position is established, the company may gradually increase the price. This strategy contrasts with price skimming, which involves high initial prices.

Activities Related to
Penetration Pricing

Activities involved in implementing a Penetration Pricing strategy.

Here is a list of Penetration Pricing related activities: Conducting market research to assess price sensitivity and competitor landscape, Setting an aggressively low introductory price for a new product/service, Planning for potential initial losses or very low profit margins, Implementing marketing campaigns to highlight the low price and attract high sales volume, Monitoring customer adoption rates and market share growth, and Strategically planning future price increases once market penetration is achieved.
These activities focus on leveraging price to quickly establish a market presence.

The Importance of
Penetration Pricing

Two team members discussing the strategic use of Penetration Pricing.

Penetration Pricing is important as a strategic tool for businesses entering new markets or launching new products, especially when facing established competitors. It can rapidly build a customer base and create economies of scale in production and distribution. By quickly capturing market share, it can also deter potential new entrants. However, this strategy requires careful financial planning, as it often means lower initial profitability. There's also a risk that customers may perceive the product as low quality due to the low price, or resist subsequent price increases. Careful analysis of costs and long-term objectives is essential.

Key Aspects of
Penetration Pricing

Low Initial Price
The core of the strategy is to set prices significantly lower than perceived market value or competitor prices at launch.

Market Share Focus
The primary objective is to quickly capture a substantial share of the market.

Discourages Competition
Low prices can make it unattractive for new competitors to enter the market.

Potential for Future Price Increases
Often involves a plan to raise prices once a loyal customer base and sufficient market share are established.

Concepts Related to
Penetration Pricing

Penetration Pricing is one of several Pricing Strategies. It is often compared with Price Skimming, which takes the opposite approach of starting with high prices. Its success depends on factors like price elasticity of demand, the company's cost structure, and its ability to achieve high sales volume to offset low profit margins initially. It's a key consideration in new product development and market entry strategies.