Accounting terms

Dictionary of all accounting terms

What is Penetration Pricing?

Penetration pricing is one of the many effective pricing strategies whereby businesses introduce a new product or service at a low price to attract new customers.

Penetration pricing is based on the idea that low pricing for goods or services is a significant incentive for customers to be aware of a new product and to make the purchase.

The Advantages of Penetration Pricing

This pricing and marketing strategy can be very effective if used correctly as it can often lead to increases in both sales volume and market share.

In turn, this can lead to decreased production costs and an increase in inventory turnover, which will help businesses with fixed overhead.

The Disadvantages of Penetration Pricing

While it has good possibilities, penetration pricing can backfire if not used correctly. One of the greatest possible disadvantages is that if the prices are set too low, it may not necessarily lead to a profit. In fact, it can lead to severe losses.

Secondly, if the low prices are only for a set introductory period, the new customers may switch out after the price levels begin to rise.

Lastly, penetration pricing could start a pricing war if not done correctly, which is normally detrimental for any parties involved. However, it is often more difficult to bear if the new business has few resources to withstand the lower prices.

For an overview of effective pricing, read our full guide on the 15 most effective pricing strategies to boost small business revenues.

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