Penetration Pricing

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DEFINITION of 'Penetration Pricing'

A marketing strategy used by firms to attract customers to a new product or service. Penetration pricing is the practice of offering a low price for a new product or service during its initial offering in order to attract customers away from competitors. The reasoning behind this marketing strategy is that customers will buy and become aware of the new product due to its lower price in the marketplace relative to rivals.

BREAKING DOWN 'Penetration Pricing'

Penetration pricing can be a successful marketing strategy when applied correctly. It can often increase both market share and sales volume. Additionally, the high sales volume can also lead to lower production costs and higher inventory turnover, both of which are positive for any firm with fixed overhead.

The chief disadvantage, however, is that the increase in sales volume may not necessarily lead to a profit if prices are kept too low. As well, if the price is only an introductory campaign, customers may leave the brand once prices begin to rise to levels more in line with rivals.

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