What is penetration pricing?

Penetration pricing is a strategy used by companies to gain market share quickly by setting a low price for a new product when it is first introduced into the market. This approach aims to attract customers away from competitors and encourage them to try the product. By offering a low initial price, businesses can stimulate demand and build a customer base, making it an effective tactic to establish a foothold in a competitive market.

Once the product gains traction and a loyal customer base is established, the company may gradually increase the price. This strategy relies on the idea that customers will appreciate the initial low price and become repeat buyers, thus offsetting any initial losses incurred from selling at a lower price. Penetration pricing is especially common in industries where there is significant competition and where capturing market share quickly can lead to economies of scale, enhancing profitability in the long run.