PRICING STRATEGY
Definition
Penetration pricing, or a penetration strategy, involves launching a new product or service at a deliberately low price to quickly capture market share
The goal is to attract a large number of customers right from the start, build customer loyalty, and then gradually raise prices once the market position has been consolidated
This approach is typical in competitive markets with high price elasticity.
Why it's important
- Accelerate customer acquisition: an attractive price reduces purchase friction and helps you quickly build brand awareness.
- Discouraging new entrants: A low price creates a barrier to entry for competitors, who will find it difficult tomatch that price without eroding their margins.
- Achieving economies of scale: Increased volume helps reduce unit costs (purchasing, production, logistics) and fund the strategy.
A concrete example
A beverage brand is launching a new functional soda on the French market
The reference price of an established competitor is €1.80 in supermarkets
The brand is pricing its new product at €0.99 for 6 months, a 45% discount
This strategy enables the brand to achieve an 8% market share in the segment in less than a year
Once the brand is established, the price was gradually raised to €1.49, maintaining superior appeal while restoring the margin.
How to measure/use it
Penetration pricing is based on a detailed analysis of the price elasticity of the category
The more price-sensitive the demand, the more effective the strategy
It is also necessary to assess the ability to sustain a reduced margin during the launch phase (typically 6 to 18 months) and to plan the price increase trajectory
Pricing analytics tools make it possible to model the price/ volume and simulate the strategy’s return on investment over a 24-month period.
Common Mistakes
- Underestimating the time required: raising prices too quickly negates the gains made.
- Don't overlook perceived value: a price that's too low can signal poor product quality and damage the brand's image.
- Failing to anticipate a competitive response: an established player could match the strategy and render it ineffective.
Learn more
- Research & Data: Elasticity Analysis to Validate the Effectiveness of a Market Penetration Strategy.
- Solutions: Pricing Analytics to model the price/volume scenario over a 24-month period.
- Tip: Develop a pricing strategy to guide the path of price increases.
- Resources: Check out our pricing FAQ to compare Penetration and Skimming pricing.
Mini FAQ
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