Penetration pricing is the pricing technique of setting a relatively low initial entry price, a price that is often lower than the eventual market price. The expectation is that the initial low price will secure market acceptance by breaking down existing brand loyalties. Penetration pricing is most commonly associated with a marketing objective of increasing market share or sales volume, rather than short term profit maximization. This article does not cite any references or sources. ... For other uses, see Brand (disambiguation). ... Next big thing redirects here. ...

The advantages of penetration pricing to the firm are:

• It can result in fast diffusion and adoption. This can achieve high market penetration rates quickly. This can take the competition by surprise, not giving them time to react.
• It can create goodwill among the all-important early adopter segment. This can create valuable word of mouth.
• It creates cost control and cost reduction pressures from the start, leading to greater efficiency.
• It discourages the entry of competitors. Low prices act as a barrier to entry (see: porter 5 forces analysis).
• It can create high stock turnover throughout the distribution channel. This can create critically important enthusiasm and support in the channel.
• It can be based on marginal cost pricing, which is economically efficient.

The main disadvantage with penetration pricing is that it establishes long term price expectations for the product, and image preconceptions for the brand and company. This makes it difficult to eventually raise prices. Some commentators claim that penetration pricing attracts only the switchers (bargain hunters) and that they will switch away from you as soon as you increase prices. There is much controversy over whether it is better to raise prices gradually over a period of years (so that consumers don’t notice), or employ a single large price increase (which is more efficient). A common solution to the price expectations problem is to set the initial price at the long term market price, but include an initial discount coupon (see sales promotion). In this way, the perceived price points remain high even though the actual selling price is low. Another potential disadvantage is the low profit margins may not be sustainable long enough for the strategy to be effective. Diffusion is the process by which a new idea or new product is accepted by the market. ... Market penetration is one of the four growth strategies as defined by Ansoff. ... A Market segment is a subgroup of people or organizations sharing one or more characteristics that cause them to have similar product needs. ... For other uses, see Word of mouth (disambiguation). ... Porters 5 forces analysis is a framework for industry analysis and business strategy development developed by Michael E. Porter in 1979 of Harvard Business School. ... Wikibooks [[wikibooks:|]] has more about this subject: Marketing Distribution (or placement) is one of the four aspects of marketing. ... In economics, profit maximization is the process by which a firm determines the price and output level that returns the greatest profit. ... For other uses, see Brand (disambiguation). ... Wikibooks has more about this subject: Marketing Sales promotion is one of the four aspects of promotional mix. ... Price points are prices for which demand is relatively high. ...

Price Penetration is most appropriate when:

• Product demand is highly price elastic.
• Substantial economies of scale are available.
• The product is suitable for a mass market (ie.: sufficient demand).
• The product will face stiff competition soon after introduction.
• There is inadequate demand in the low elasticity market segment for price skimming.
• In industries where standardization is important. The product that achieves high market penetration often becomes the industry standard (eg.: Microsoft Windows) and other products, even superior products, become marginalized. Standards carry heavy momentum.

An interesting variant of the price penetration strategy is the bait and hook model (also called the razor and blades business model) in which an initial product is sold at a very low price but subsequently purchased products (such as refills) are sold at a higher price. This is an almost universal tactic in the desktop printer business, with printers selling for as little as $100 and including two ink cartridges, which cost $30 each. In economics and business studies, the price elasticity of demand (PED) is an elasticity that measures the nature and percentage of the relationship between changes in quantity demanded of a good and changes in its price. ... The increase in output from Q to Q2 causes a decrease in the average cost of each unit from C to C1. ... Price Skimming Price skimming is a pricing strategy in which a marketer sets a relatively high price for a product or service at first, then lowers the price over time. ... The razor and blades business model (also called the bait and hook model or the tied products model) works by selling a master product at a subsidised price, and making the profit on high margin consumables that are essential to the use of the master product. ...

Taken to the extreme, penetration pricing becomes predatory pricing, when a firm initially sells a product at unsustainably low prices to eliminate competition and establish a monopoly. In most countries, predatory pricing is illegal, although it can be difficult to distinguish predatory pricing from penetration pricing. Predatory pricing is the practice of a dominant firm selling a product at a loss in order to drive some or all competitors out of the market, or create a barrier to entry into the market for potential new competitors. ... This article is about the economic term. ... This article is about anti-competitive business behavior. ...

See also

• pricing
• marketing
• microeconomics
• production, costs, and pricing
• business model
• price skimming