Definition:
The basic idea of penetration pricing is to attract customers to a new product or service by offering a low price in the early market phase.
Explanation
In the case of price penetration, companies promote new products or services by setting a low price. This can lead to market penetration and result in higher market shares and sales volumes by winning customers from competitors.
What to watch out for
There is a risk of losing customers once prices increase. Customers often expect permanently low prices and may become dissatisfied and stop purchasing the product or service in case of a price increase.
By introducing a low entry price, consumers may get the impression that the brand is of low quality.
Further reading
Penetration Pricing - Investopedia
Penetration Pricing - Corporate Finance Institute
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