What is Penetration pricing?
To attract customers' attention, the penetration pricing strategy involves offering a new product or service at a low initial price.
To attract customers’ attention, the penetration pricing strategy involves offering a new product or service at a low initial price. The goal is to aggressively gain market share by getting customers in the door with low prices.
Price penetration and price skimming are two common strategies for launching new products. Both are temporary and provide distinct ways to maximise the impact of a launch.
Knowing the distinctions between them can assist you in selecting a strategy that maximises profits while minimising competition.
- New products are sold at low prices to build a customer base with penetration pricing. Profit margins are lower in the short term, but high sales volumes compensate for the low margins. As demand grows, you can raise the price.
- When you already have customers who are interested in your products, price skimming is more effective. Brands charge a high price to maximise short-term profits, then gradually reduce it to attract more customers.
A skimming strategy exposes you to competition that will undercut your prices. If you use penetration pricing, you will be the company that sells comparable products at a lower price than your competitors.
Lowering prices, according to the Law of Demand, will increase demand. Consumers are more likely to buy what you have to offer when you offer more value for less.
Assume you sell refrigerators. They all serve the same purpose: to keep food cold. Some have HD touchscreens and smartphone connectivity. Some establishments have specialised ice dispensers. These features are unimportant to the average consumer. They want a refrigerator that will keep their food cold and fresh.
A market penetration strategy would be an excellent way to bring a new refrigerator to market.