Penetration pricing

Penetration pricing is a pricing strategy where the price

of a product is initially set low to rapidly reach a wide
fraction of the market and initiate word of mouth.[1]
The strategy works on the expectation that customers
will switch to the new brand because of the lower price.
Penetration pricing is most commonly associated with
marketing objectives of enlarging market share and exploiting economies of scale or experience.[2][3]

Another potential disadvantage is that the low prot margins may not be sustainable long enough for the strategy
to be eective.
Price penetration is most appropriate where:
Product demand is highly price elastic.
Substantial economies of scale are available.
The product is suitable for a mass market (i.e.
enough demand).

Motivation

The product will face sti competition soon after

introduction.

The advantages of penetration pricing to the rm are:[4][5]

It can result in fast diusion and adoption. This can
achieve high market penetration rates quickly. This
can take the competitors by surprise, not giving them
time to react.

There is not enough demand amongst consumers to

make price skimming work.
In industries where standardization is important.
The product that achieves high market penetration
often becomes the industry standard (e.g. Microsoft
Windows) and other products, whatever their merits, become marginalized. Standards carry heavy
momentum.

It can create goodwill among the early adopters

segment. This can create more trade through word
of mouth.
It creates cost control and cost reduction pressures
from the start, leading to greater eciency.

A variant of the price penetration strategy is the bait and

It discourages the entry of competitors. Low prices hook model (also called the razor and blades business
act as a barrier to entry (see Porters 5-forces analy- model), where a starter product is sold at a very low price
sis).
but requires more expensive replacements (such as rells)
It can create high stock turnover throughout the which are sold at a higher price. This is an almost unidistribution channel. This can create critically im- versal tactic in the desktop printer business, with printers
selling in the US for as little as $100 including two ink
portant enthusiasm and support in the channel.
cartridges (often half-full), which themselves cost around
It can be based on marginal cost pricing, which is $30 each to replace. Thus the company makes more
economically ecient.
money from the cartridges than it does for the printer itself.
The main disadvantage with penetration pricing is that it
Taken to the extreme, penetration pricing is known as
establishes long term price expectations for the product,
predatory pricing, when a rm initially sells a product or
and image preconceptions for the brand and company.
service at unsustainably low prices to eliminate competiThis makes it dicult to eventually raise prices. Some
tion and establish a monopoly. In most countries, predacommentators claim that penetration pricing attracts only
tory pricing is illegal, although it can be dicult to difthe switchers (bargain hunters), and that they will switch
ferentiate illegal predatory pricing from legal penetration
away as soon as the price rises. There is much contropricing.
versy over whether it is better to raise prices gradually
over a period of years (so that consumers dont notice),
or employ a single large price increase. A common solution to this problem is to set the initial price at the long 2 Research
term market price, but include an initial discount coupon
(see sales promotion). In this way, the perceived price In an empirical study, Martin Spann, Marc Fischer and
points remain high even though the actual selling price is Gerard Tellis analyze the prevalence and choice of dylow.
namic pricing strategies in a highly complex branded
1

market, consisting of 663 products under 79 brand names

of digital cameras. They nd that, despite numerous recommendations in the literature for skimming or penetration pricing, market pricing dominates in practice. In particular, the authors nd ve patterns: skimming (20% frequency), penetration (20% frequency), and three variants
of market-pricing patterns (60% frequency), where new
products are launched at market prices. Skimming pricing launches the new product 16% above the market price
and subsequently increases the price relative to the market price. Penetration pricing launches the new product
18% below the market price and subsequently lowers the
price relative to the market price. Firms exhibit a mix
of these pricing paths across their portfolios. The specic pricing paths correlate with market, rm, and brand
characteristics such as competitive intensity, market pioneering, brand reputation, and experience eects.[6]

See also
Pricing
Marketing
Microeconomics
Outline of industrial organization
Business model
Price skimming
Sales promotion

References

[1] J Dean (1976). Pricing Policies for New Products. Harvard Business Review 54 (6): 141153.
[2] GJ Tellis (1986). Beyond the Many Faces of Price: An
Integration of Pricing Strategies. Journal of Marketing
50 (October): 146160.
[3] Penetration Pricing
[4] Pricing Strategy Toolkit (with Excel Model)
[5] Penetration Pricing
[6] M Spann, M Fischer, GJ Tellis (2015).
Skimming or Penetration? Strategic Dynamic Pricing for
New Products. Marketing Science 34 (2): 235249.
doi:10.1287/mksc.2014.0891.

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