Penetration Pricing

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.

Sources & further reading

Penetration Pricing - Investopedia

Penetration Pricing (investopedia.com)

Penetration Pricing - Corporate Finance Institute

Penetration Pricing - Definition, Example, Advantages and Disadvantages (corporatefinanceinstitute.com)