Legal Definitions - penetration pricing

Penetration pricing is a business strategy where a company introduces a new product or service at an unusually low initial price. The main objectives are to quickly attract a large customer base, gain significant market share, and deter potential competitors from entering the market. The company typically aims to either raise prices later once it has established a strong presence or to profit from high sales volumes at the lower price point.

• Example 1: A New Streaming Service

  Imagine a brand-new streaming platform launching into a market already crowded with established giants. To entice subscribers, it offers a monthly subscription fee that is significantly lower than its competitors for the first year. After this introductory period, the price increases to a rate more in line with the market average.

  This illustrates penetration pricing because the service is intentionally setting an initial price below its long-term target or competitor rates. Its goal is to rapidly acquire a large number of users, establish its brand, and gain a foothold in a competitive industry before gradually adjusting its pricing.

• Example 2: An Eco-Friendly Cleaning Product Line

  A startup introduces a new line of environmentally friendly cleaning products. To encourage consumers to try their brand over well-known conventional and other eco-friendly options, they price their initial offerings (e.g., all-purpose cleaner, dish soap) at a lower cost per ounce than most comparable products on the shelf. They plan to maintain this lower price for the first six months, hoping to build brand loyalty and positive word-of-mouth.

  This demonstrates penetration pricing as the company is using a lower initial price to overcome consumer hesitation and encourage trial in a market where brand loyalty can be strong. By making their products more accessible financially, they aim to quickly capture a segment of the market.

• Example 3: A New High-Speed Internet Provider

  A new internet service provider (ISP) enters a city where two major providers have historically dominated. To break into the market, the new ISP offers introductory packages with very high speeds at a monthly rate that is considerably lower than what the existing providers charge for similar speeds, often for the first 12 to 24 months of service. After the promotional period, the price increases to a standard rate.

  This is an example of penetration pricing because the ISP is strategically undercutting established competitors with aggressive initial pricing. Their objective is to quickly sign up a large number of households, disrupt the existing market duopoly, and establish a significant customer base before transitioning to more profitable pricing models.