Penetration Pricing Definition, Examples, and How to Use It

Penetration pricing is a pricing strategy in which a company sets a low price for a new product or service in order to gain market share. The goal is to attract new customers and quickly establish a strong presence in the market. Once the company has achieved a certain level of market share, it can then raise prices and increase its profits.

Penetration pricing is often used by companies that are entering a new market or that are launching a new product. It can also be used by companies that are trying to compete with a dominant competitor.

There are a number of advantages to using penetration pricing. First, it can help a company to quickly gain market share. By setting a low price, the company can make its product or service more affordable than its competitors, and this can attract new customers. Second, penetration pricing can help a company to build brand awareness. By setting a low price, the company can make its product or service more visible to consumers, and this can help to build brand awareness. Third, penetration pricing can help a company to deter competition. By setting a low price, the company can make it difficult for competitors to enter the market, and this can help to protect its market share.

However, there are also some disadvantages to using penetration pricing. First, it can lead to lower profits. By setting a low price, the company is sacrificing profits in the short term in order to gain market share. Second, penetration pricing can lead to a price war. If competitors match the company's low price, the company may be forced to lower its prices even further, which could lead to losses. Third, penetration pricing can damage the company's brand image. If consumers perceive the company as being a low-price provider, they may not be willing to pay higher prices for the company's products or services in the future.

Overall, penetration pricing can be a effective strategy for gaining market share and building brand awareness. However, it is important to weigh the potential benefits and risks before using this strategy.

Here are some examples of companies that have used penetration pricing:

* When Apple introduced the iPhone in 2007, it set a price of \$499 for the 8GB model. This was significantly lower than the price of competing smartphones at the time, and it helped Apple to quickly gain market share.
* When Amazon launched its Kindle e-reader in 2007, it set a price of \$399. This was significantly lower than the price of competing e-readers at the time, and it helped Amazon to quickly gain market share.
* When Netflix launched its streaming service in 2007, it set a price of \$7.99 per month. This was significantly lower than the price of competing streaming services at the time, and it helped Netflix to quickly gain market share.

These are just a few examples of companies that have used penetration pricing successfully. If you are considering using this strategy, it is important to weigh the potential benefits and risks before making a decision.