At the same time, this strategy can undermine the value of the brand if cheap prices are associated with poor quality. Penetration pricing will be efficient only if a significant number of consumers are willing to try a new product or service, or abandon products they used to purchase. This pricing strategy works best in industries where consumers are sensitive to the price of the product, and therefore can switch to the brand that offers a better deal. Therefore, when the penetration strategy is no longer effective, companies need to promote other aspects of their products (such as quality or service).īy using a penetration strategy, a company can achieve a large sales volume by underpricing its product relative to competitors’ substitutes. As a result, it might repel customers and force them to switch to competitors’ offers. Typically, this is a short-term pricing strategy because sooner or later, the seller has to return prices back to a competitive level. The goal of penetration pricing is to attract as many consumers as possible before competitors can react by cutting prices even further. The new product is then sold at a significantly lower price, even if the profit falls below an acceptable level. It is based on the assumption that a lower price is perceived as providing a better deal.įor a penetration pricing strategy to work, a company needs to conduct thorough market research and see how much competitors are charging for a product with similar features/functionality. If it is hard to compare the quality of similar products, a company may enjoy low price sensitivity, and it will be easier to compete with late-entry brands.Īs mentioned previously, penetration pricing is used when a seller wants to quickly capture a large share of the market. If a product is bought frequently, penetration pricing allows the company to attract an additional market segment by giving it a chance to try the product before a price race begins. A penetration price allows the seller to capture a significant portion of a potential market before it faces competition from competitors. In the case of durable goods, penetration pricing is also used in response to the threat of new competitors. The seller can win a large market share by neutralizing potential competitors who are unable to achieve similar cost reductions after offering substitutes for the product. This approach entices customers to make a purchase and allows a seller to quickly gain product awareness before other vendors come with better deals.Ī penetration pricing strategy can be useful in a situation when a company launches a new product on the market with moderate competition.

Penetration pricing is a pricing strategy used by companies in an attempt to ‘penetrate’ the market by offering lower prices than competitors.

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