What does the term 'penetration pricing' refer to?

Penetration pricing refers to the strategy of setting a low initial price for a product in order to attract customers and gain market share quickly. This approach is often employed when a company is entering a competitive market where it needs to encourage consumers to try its product over established competitors. By offering a lower price initially, the company can draw in cost-sensitive customers, build a customer base, and generate higher sales volume. Once the product gains traction and brand recognition, the company may then consider adjusting prices as needed.

This strategy is particularly effective in markets with significant competition, where capturing attention and encouraging trial usage are crucial for long-term success. In contrast to setting high prices or maintaining average market prices, penetration pricing prioritizes market entry and volume sales, making it a critical tactic for new market entrants looking to make an impact.