Q&A - When is it appropriate for a firm to use penetration pricing?

You often see the tagline “special introductory offer” – the classic sign of penetration pricing. The aim of penetration pricing is usually to increase market share of a product, providing the opportunity to increase price once this objective has been achieved.

Penetration pricing is the pricing technique of setting a relatively low initial entry price, usually lower than the intended established price, to attract new customers. The strategy aims to encourage customers to switch to the new product because of the lower price.

Penetration pricing is most commonly associated with a marketing objective of increasing market share or sales volume. In the short term, penetration pricing is likely to result in lower profits than would be the case if price were set higher. However, there are some significant benefits to long-term profitability of having a higher market share, so the pricing strategy can often be justified.

Penetration pricing is often used to support the launch of a new product, and works best when a product enters a market with relatively little product differentiation and where demand is price elastic – so a lower price than rival products is a competitive weapon.

Amongst the advantages claimed for penetration pricing include:

- Catching the competition off-guard / by surprise
- Encouraging word-of-mouth recommendation for the product because of the attractive pricing (making promotion more effective)
- It forces the business to focus on minimising unit costs right from the start (productivity and efficiency are important)
- The low price can act as a barrier to entry to other potential competitors considering a similar strategy
- Sales volumes should be high, so distribution may be easier to obtain

Penetration pricing strategies do have some drawbacks, however:

- The low initial price can create an expectation of permanently low prices amongst customers who switch. It is always harder to increase prices than to lower them
- Penetration pricing may simply attract customers who are looking for a bargain, rather than customers who will become loyal to the business and its brand (repeat business)
- The strategy is likely to result in retaliation from established competitors, who will try to maintain their market share