In this article, we will examine the penetration pricing strategy definition and benefits of penetration pricing, as well as enumerate strategies that are commonly confused with it. You will learn how to establish your company in a new market and capture market share, while maintaining long term profitability.

Penetration Pricing Definition

Penetration pricing is a marketing strategy employed by companies to attract customers in markets with strong competition. Generally used by new entrants, it presupposes offering lower prices compared to other competitors. The small initial cost allows the company to make a potential customer aware of their product or service. The extreme use of the penetration pricing formula is called predatory pricing strategy.

How Penetration Pricing Works?

By setting the price below competitors’ offerings, businesses improve their recognition in the eyes of a customer. This helps to accumulate a customer base quickly. Essentially, penetration pricing method empowers companies to get new customers not through the inherent value, but through price point.

As time passes, it is common to raise the price, the rationale being that a customer will be willing to pay more for a product or service they have some experience with. However, the process is quite complicated, and doesn’t always go smoothly. A customer who was attracted by the low price tends to choose a cheaper alternative once the price starts to increase. The key strategy is to build customer loyalty.

Primary Purpose of Penetration Pricing

The main goal is to enter a new market. A penetration pricing policy is easy to adopt and is a sure way to stand out. The low introductory price gives results in the form of new customers and differentiates the brand from others. Advantages of penetration pricing strategy are manifold, but let’s briefly examine some of the key ones:

• Enticing new customers in a market teeming with competitors. If the clients like the product or service, they will be willing to pay more once they lose the initial discount.

• Building loyalty through educating consumers about what the company has to offer. Customers will be more willing to try the company's other offerings if they are impressed with what they’ve already tried.

• Generating demand by selling products in high volume and in short-term. Achieving high inventory turnover improves the perception of your brand and leads to cost advantages, like the ability to effectively use economies of scale to reduce production costs.

• Luring customers. The low price point is a bait taken easily in highly saturated markets. By playing your cards right, it is possible to even drive competitors out completely and capture a huge portion of the market share.