What is “Penetration Pricing”?

Penetration pricing is a pricing strategy designed to attract customers by setting an initially low price for a new product or service. The goal is to capture a significant portion of the market quickly, build customer loyalty, and drive sales.

Once the brand has established a customer base and market presence, the price is gradually increased to a more profitable level. This strategy is common in highly competitive industries and when entering new markets.

Example

"The company used penetration pricing to launch its new streaming service, offering a low subscription fee for the first six months to quickly gain subscribers."

How is “Penetration Pricing” Used in Business?

In business, penetration pricing is often used by companies launching new products or services, particularly in crowded markets. It helps generate early customer interest and build brand recognition.

However, businesses must be cautious with this approach, as the low initial price can lead to challenges when it comes time to raise prices, potentially losing customers in the process.

Pro Tip

While penetration pricing can help quickly gain market share, ensure the business model can handle future price increases without alienating customers. It’s essential to communicate the reasons behind any price hikes clearly.

Related Terms

Cost-Plus Pricing, Skimming Pricing, Discount Pricing, Market Penetration Strategy