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 from the outset, build customer loyalty, and then gradually raise prices once the market position has been established. 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 struggle to match it 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 list price of an established competitor is €1.80 in supermarkets. The brand is pricing its new product at €0.99 for six 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 is gradually raised to €1.49, maintaining greater appeal while restoring margins.
How to measure/use it
Penetration pricing relies on a detailed analysis of the category’s price elasticity. 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 enable modeling of the price-volume relationship and simulation of 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.