Penetration pricing is a pricing strategy where a new product is introduced to the market at a very low initial price. It is aimed at rapidly increasing the market penetration or market share of the product.
- Prices are kept very low, sometimes even below costs, to attract a large customer base
- Goal is to quickly grab a significant chunk of market share early on
- Once market share targets are achieved, prices are increased over time
Setting an aggressively low initial price builds rapid trial among price-sensitive customers. It also deters competitors from entering the market due to the perceived consumer loyalty.
This strategy works best for new innovative products with growing demand or when the manufacturer wants to disrupt an existing market.
Drawbacks include sacrificing initial profits and risk of competitors undercutting the price before market share goals are met. Careful analysis is needed regarding costs vs long term benefits.