Penetration pricing is a competitive pricing strategy, particularly effective in attracting new customers and increasing ecommerce sales.
The simple aim of a penetration pricing strategy is to set a very low initial entry price in order to tempt potential customers into switching from the competition’s services. This is a particularly useful pricing strategy for new ecommerce products entering a saturated and competitive market. If a product has minimal differentiation from your competition, then offering a substantially lower price can be your best strategy for standing out.
One of the most common examples of penetration pricing is when you see special ‘introductory’ offers. This competitive method of pricing is great for increasing your market share and pulling in a large amount of new customers for brand awareness. Once you have made an impact in the market, the price can be raised to a more profitable amount.
Pros and Cons
Penetration pricing is brilliant for catching the competition by surprise. Offering such low prices to begin with will also encourage good product promotion through customer word-of-mouth.
However, while ecommerce sales may greatly increase, profits are likely to be negatively affected in the short-term. In addition, the low initial pricing may simply attract ‘bargain hunter’ customers as opposed to loyal long-term customers.