In theory, customers buy these “loss leaders” and then spend the savings on the company’s other, more profitably priced goods. Companies sell a product or service at a loss - or narrow margin - to attract more customers. Loss leader pricing: Loss leader pricing is a slightly different marketing strategy and is illegal in half of U.S.The business plans to increase prices in the future, often setting a time limit on the introductory rate. Penetration pricing: With this pricing strategy, a business sets a low price on a new product or service in an attempt to gain significant market share quickly.There are a few pricing strategies that sound similar to penetration pricing, but have very important differences. A low price is the foot in the door for many new businesses. High prices could hurt sales and limit growth during the crucial launch period. Businesses selling price-elastic products - meaning their customers' buying habits shift based on price - also use the penetration strategy. The hope is that the sales volume will make up for the below-average cost.

Penetration pricing is generally used when demand for a new product or service is projected to be high. Competitors have less time to respond before the company amasses market share and becomes the new standard of choice. The company sets a price that’s a bargain for its unique value, while still being cheaper than the familiar options. Price is removed as a barrier to get people to try the new product or service. If it’s an innovative product, this theory works the same way. After a period of growth, the business typically raises prices to increase profits and reflect the product’s rising value. Competitors' customers may switch over to the cheaper offer, and new customers buy in too. The initial price undercuts competitors, forcing them to match the offer or quickly apply other strategies. Penetration pricing is when businesses introduce a low price for their new product or service. The goal is to generate demand, rapidly build a customer base, and maximize brand loyalty in a short time. How does a penetration pricing strategy work?Ī penetration pricing strategy prioritizes market share over profits for a given time period. We’ll explain how it’s different from similar pricing tactics, provide examples, and cover the advantages and disadvantages of penetration pricing. Learn the ins and outs of using a penetration pricing strategy.

Many high-profile startups have used this strategy to disrupt industries and become today’s market leaders. A penetration pricing strategy is built on this concept.īy entering the market with a low price, businesses aim to attract customers quickly - then gradually raise their price. For many consumers, nothing makes their buying decision easier than price. New businesses rely on clear and powerful differentiators to stand out from the competition.