what is penetration pricing 
penetration pricing is a marketing strategy used by businesses to attract customers to a new product or service by offering a lower price during its initial offering the lower price helps a new product or service penetrate the market and attract customers away from competitors market penetration pricing relies on the strategy of using low prices initially to make a wide number of customers aware of a new product the goal of a price penetration strategy is to entice customers to try a new product and build market share with the hope of keeping the new customers once prices rise back to normal levels penetration pricing examples include an online news website offering one month free for a subscription based service or a bank offering a free checking account for six months understanding penetration pricingpenetration pricing similar to loss leader pricing can be a successful marketing strategy when applied correctly it can often increase both market share and sales volume additionally a higher amount of sales can lead to lower production costs and quick inventory turnover however the key to a successful campaign is keeping the newly acquired customers for example a company might advertise a buy one get one free bogo campaign to attract customers to a store or website once a purchase has been made ideally an email or contact list is created to follow up and offer additional products or services to the new customers at a later date new entrants often use penetration pricing strategy to quickly steal a portion of the market share because its brand is not yet known it must rely on favorable pricing to differentiate itself from other more established market participants once a company has attracted customers via penetration pricing it often changes strategy to create brand loyalty convert customers into long term consumers and drive competitors out of the market penetration pricing may be temporary i e an offer for this weekend only or embedded into the company s long term strategy i e a deal whenever a customer switches from a competitor tips on successful penetration pricingpenetration pricing is just the first step to a long term plan to attract convert and establish relationships with new customers in order for a penetration pricing strategy to work it must often meet the following criteria or adhere to the following guidelines penetration pricing is most effective when there are goods in high demand if there is not a large market for a product it often is less important the price of the good because there are less consumers to capitalize and attempt to retain therefore the most successful penetration pricing strategies rely on broader markets with more exposure where a single penetration pricing strategy can have the greatest effect though easier said than done the goal of a pricing strategy is not to get into a spiraling competition with another company the purpose of penetration pricing is not to simply offer a very low price it is to most effectively take market share price wars can be expensive ineffective and may publicly damage the reputation of a company should the battle ineffectively evolve as the company attracts new customers it is imperative that the company seeks out economies of scale with more customers the company should be able to more efficiently use resources obtain pricing and scale operations for example consider a company ordering raw materials for inventory with more customers and more orders the company should be able to purchase larger quantities and reduce its cost per unit produced one of the worst strategies to employ with penetration pricing is to raise the price back to normal too quickly not only does this open the door for a competitor to swoop in an employ their own penetration pricing strategy but quickly making changes breaks customer trust with the customer on board with the new company the new company must slowly make changes and gradually raise prices to more profitable levels else it will face the risk of losing the long term value though penetration pricing is a short term strategy the ultimate goal is to foster long term loyalty that means honoring existing pricing where applicable understanding limitations on what can be offered and still emphasizing value in product quality and customer service as many telecom companies offer sign up bonuses or one time incentives to switch providers it is then their responsibility to foster the business relationship companies that employed penetration pricing themselves may be exposed to penetration pricing counterstrategies when they finally decide its time to raise prices penetration pricing participantsthere are three primary users of penetration pricing each of which are discussed below most often penetration pricing is used by new competitors entering a market for the very first time these companies do not have an existing presence in the market and are often not known or may be young these companies may have limited resources so they may not be able to deploy capital for aggressive marketing campaigns the ultimate goal of these new companies is to steal market share from market leaders in other cases more established companies may introduce new products to the market although the brand name may be recognized and known the company may not be known for some specific products because the company may have a large stockpile of resources it often is able to sacrifice short term profits in favor of establishing itself in a new market last some companies may use penetration pricing for items that have high price elasticity price elasticity is the relationship between demand and price for a good if a small change in price creates a large change in demand the price is said to highly elastic in these cases a company may very slightly reduce its price to achieve the benefits of the price elasticity penetration pricing may occur every time you use a coupon as a company or product is trying to lure you into paying a lower price in exchange for your business relationship advantages and disadvantages of penetration pricingthe primary advantage of penetration pricing is that is may be one of the quickest ways to convert a customer many customers may not be loyal to a specific brand in these cases it may be easiest to simply offer a lower price to attract their business whether a company is a service company retailer or manufacturer all types of companies can offer penetration pricing strategies companies can successfully use this short term strategy and leverage new customers into long term success companies can capitalize on goodwill earned when their pricing discounts were available and this may foster brand recognition for being one of the low price providers in an industry as long as consumers associate the penetration pricing company as the low cost provider there will always be long term brand equity created via penetration pricing penetration pricing also fosters loyalty because consumers directly benefit from the lower price though some of this loyalty is jeopardized as a company begins to raise its prices in the long term consumers may not directly benefit from conversion tactics quite like they can when companies battle over lower prices penetration pricing may also help naturally foster economies of scale if pricing is aggressive enough a massive amount of customers may be converted as a company has larger order quantities and is able to build greater infrastructure it often experiences less cost per unit due to manufacturing or operational efficiencies though customers are attracted by a very low price it may not be feasible to offer that price forever the new company is trying to eventually make a profit and some penetration pricing strategies result in short term losses a company must be able to temporarily cover its expenses if it is not earning enough from customers during the penetration pricing period once customers are lured there is a significant risk of consumers leaving once prices are increased consider the fact that a consumer lured by penetration pricing may leave because of another penetration pricing strategy a company must be incredibly sensitive to raising prices changing contract agreements and making changes in the long term some consumers may view penetration pricing as an unfavorable marketing tactic a company may get the reputation of having lower quality goods should consumers inappropriately associate low prices with product quality consumers may also see through the strategy and not appreciate the attempt to be bailed by short term marketing tactics as other companies take wind of what is happening they may decide to price match or further reduce their own price in addition many companies now offer price matching and may have a greater warranty or customer service process companies must move delicately as creating an expensive price war often leaves the new company in a less favorable position than before last penetration pricing strategies are not useful as long term strategies they take effort to create then a company needs to change direction again and deploy more resources to create long term value these changing strategies may be burdensome to finance and must be aligned in order to effectively streamline a short term customer into a lifetime purchaser may be one of the fastest ways to convert a customercan be used by a variety of types of companiesmay foster brand recognition as the low price providerdirectly benefit consumersmay foster economies of scalemay result in short term lossesmust be gradually phased out as customers may leave as easily as they were luredmay result in price war which leaves the new company in a worst position than beforenot useful as a long term strategy by itselfpenetration pricing vs skimmingwith pricing penetration companies advertise new products at low prices with modest or nonexistent margins conversely a skimming strategy involves companies marketing products at high prices with relatively high margins a skimming strategy works well for innovative or luxury products where early adopters have low price sensitivity and are willing to pay higher prices effectively producers are skimming the market to maximize profits over time prices will reduce to levels comparable to market prices in order to capture the rest of the market small businesses or those in niche markets can benefit from price skimming when their products or services are differentiated from competitors and when synonymous with quality and a positive brand image real world examplescostco and kroger two major grocery store chains use market penetration pricing for the organic foods they sell traditionally the margin on groceries is minimal however the margin on organic foods tends to be higher kroger and costco use a penetration pricing strategy when they sell organic foods at lower prices the lower costs allow kroger and costco to maintain their profit margins even while undercutting the pricing of their competition cell phone carriers also implement penetration pricing by offering the latest cell phones when a new consumer agrees to a long term service contract for example t mobile and other carriers now offer a free phone when a customer switches to a t mobile plan from a plan with another company 1 the company can t simply survive forever by giving away these phones for free 