Penetration Pricing – Definition

Cite this article as:"Penetration Pricing – Definition," in The Business Professor, updated December 3, 2019, last accessed October 26, 2020, https://thebusinessprofessor.com/lesson/penetration-pricing-definition/.

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Penetration Pricing Definition

Penetration pricing refers to a marketing strategy utilized by businesses for attracting customers to a brand new product or service. Penetration pricing involves offering a low price for a new product or service during its first offering. The lower price assists in luring customers away from competitors. A marketing strategy such as this depends on the concept of low prices making a customer informed if a new product. The price attracts the customer to give the new product a try.

A Little More on What is Penetration Pricing

Penetration pricing, synonymous with loss leader pricing, can be an effective marketing technique when applied correctly. Often, it can increase sales volume and market share. Also, an increased amount of sales can result in lower production costs, as well as, quick inventory turnover.

The main disadvantage is that an increased sales volume might not result in a profit supposing prices must remain low. Additionally, supposing the low price is an aspect of an introductory campaign, curiosity might make customers pick the brand at the initial stage, but once the price starts rising or levels with a competitor, they might switch back to the competing brand.

Penetration Pricing Versus Skimming

Skimming is the opposite pricing technique of penetration pricing. With penetration pricing, companies exhibit new products at affordable prices, with non-existent or modest margins. Utilizing skimming, they sell products at exorbitant prices with really high margins. This strategy works perfectly for luxury or innovative products where early adopters are sensitive to low prices and would pay higher prices. Essentially, producers are skimming the market in order to maximize profits. Eventually, prices would drop to levels similar to market prices so as to capture the rest of the market.

Small businesses or businesses in niche markets can gain from price skimming when either their products or services are differentiated from those of competitors and when similar to the quality and a brand image that is quality.

Example of Penetration Pricing

Kroger and Costco, two main grocery store chains, make use of penetration pricing because of the organic foods they sell. In the traditional sense, there is a minimal margin on groceries. However, there is a higher margin on organic foods. Furthermore, the need for natural or organic foods is growing faster than the market for non-organic groceries. Due to this, lots of grocers provide wider organic food selections at premium rates to increase their profit margin.

However, Costco and Kroger utilize a penetration pricing strategy. They sell organic foods at cheaper prices. Effectively, they are leveraging penetration pricing in order to increase their wallet share. While the penetration pricing strategy might be risky for grocery stores that are small, economies of scale allow Costco and Kroger to adopt this strategy.

References for “Penetration Pricing

https://www.investopedia.com/terms/p/penetration-pricing.asp

https://corporatefinanceinstitute.com › Resources › Knowledge › Strategy

https://en.wikipedia.org/wiki/Penetration_pricing

https://www.tutor2u.net/business/reference/penetration-pricing

https://smallbusiness.chron.com › Business Planning & Strategy › Pricing Strategy

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