What is Penetration pricing?

Business & Management
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#1

Typically when a new product is launched in a homogenous market, the lowest price point is chosen for launch, encouraging trial. This type of pricing is called penetration pricing. Most “me too” brands go for this, leading to price wars - before the market settles for a viable equilibrium.

#2

The organization following this pricing strategy enters the market with a low price of their product or service with the aim of attracting more customers.

It can be successful in two ways:

  1. Keeping price low in initial stages and once customers get habitual to their product or service than increasing the price at later stages to earn more profit. Example: Swiggy, they enter the food delivery market and keep the prices of their service low and free of cost as well, and once customers get habitual to their service they start increasing their price to earn more revenue.

  2. The company enters the market with a low price of its product/service to earn a huge customer base and once the company is able to build a good customer base than they can enjoy the benefits of economies of scale which leads to lower per-unit cost and earn higher profits.