Have you ever asked “what is penetration pricing?” If so, you’re not alone. In this article (part of our extensive pricing strategies breakdown guide), we’ll break down penetration pricing and help you decide if it’s the right strategy for you.
Penetration pricing is one of the best-known strategies for entering a competitive market with an existing set of alternatives. But while many people have heard of it, fewer truly understand penetration pricing advantages and disadvantages, how it differs from price skimming, and when it makes sense to use penetration pricing in a modern, data-driven retail environment.
In this guide, we’ll go beyond the definition and explore price skimming and penetration pricing side by side, look at concrete penetration pricing strategy examples, and give you a clear framework to decide whether this approach fits your brand, your margins, and your long-term positioning.
So what is penetration pricing?
To answer that question, you first have to understand market penetration. Market penetration occurs when a company launches a new product in a market where similar products already exist. Since there is already an alternative to the product, marketing and pricing teams need to be creative to figure out how to make their product stand out.
One way to do this is through a penetration pricing strategy, or a price penetration strategy. A penetration pricing strategy lets businesses attract customers to a new product by offering a discounted price upon its initial offering. After generating enough interest and gaining market share, a company will then begin to raise the price again back to market levels.
The goal of a penetration pricing strategy is to introduce consumers to a product at a low risk, gather interest in a product, and build brand loyalty — not necessarily to turn a profit. Instead, the major objectives associated with a market penetration pricing strategy are to:
These goals are achieved through low, low prices which are raised again after a certain period. Companies that employ this strategy will use a price monitoring software to track average market prices over a given period of time, then use that data to calculate their introductory price.
In today’s highly transparent, online-first world, penetration pricing meaning is closely tied to visibility and speed. You use price as an aggressive lever to:
It’s a strategy that can be extremely powerful if you understand both the upside and the downside—and if you already know what happens after the introductory phase ends.
Executing a penetration pricing strategy at scale requires more than simply setting a low introductory price. In modern retail, brands increasingly rely on dynamic pricing software to apply penetration pricing in a controlled, data-driven way. This is where Omnia Retail plays a critical role.
As a dynamic pricing tool, Omnia Retail enables retailers and brands to launch aggressive penetration pricing while still protecting margins and long-term profitability. Instead of relying on static discounts, Omnia continuously analyzes competitor prices, market demand, and price elasticity to determine where low entry prices will have the highest impact on market share growth.
With Omnia Retail’s pricing software, penetration pricing can be applied selectively, by product, category, channel, or time window, ensuring that low introductory prices are used strategically rather than across the board. Built-in price floors, automated rules, and real-time market monitoring help prevent margin erosion and reduce the risk of triggering an uncontrolled race to the bottom.
Most importantly, Omnia Retail supports the exit strategy of penetration pricing. As market share, visibility, and customer adoption increase, the platform dynamically adjusts prices back toward sustainable market levels. This allows brands to transition smoothly from penetration pricing to long-term value-based or competitive pricing, without losing control or damaging brand perception.
Penetration pricing is often confused with price skimming, but these two strategies are very different. Understanding skimming vs penetration pricing is essential if you want to pick the right approach for a new product launch.
Price skimming is a strategy used by luxury products or other high-ticket items in inelastic categories to maximize margin. Instead of offering a low price for a product, companies using a price skimming strategy will put a high price on their products and optimize for high margins from early adopters.
Price skimming is frequently used by companies with high brand recognition and loyalty or products that offer significant amounts of differentiation from competitors. That’s why companies like Apple can get away with charging a relatively high price for new and innovative products: early adopters are willing to pay a premium.
When you compare price skimming and penetration pricing, several clear differences emerge:
In short, use skimming when you have something truly new, differentiated, and scarce — and when your brand can support a higher price. Use penetration when you enter a crowded market with similar alternatives and you want to win quickly on price, volume, and visibility.
When deciding whether to use a penetration pricing strategy, it’s important to weigh the pros and cons. While penetration pricing is considered to be a great approach to pricing for maximum visibility in the market, it also may harm your brand perception if you don’t execute the strategy well.
Below, we look at the main penetration pricing advantages and disadvantages so you can make an informed decision.
There are a few key points that make penetration pricing so powerful.
1. Introduces New Customers To Your Product Offering At A Low Risk
One major objective associated with a market-penetration pricing strategy is to connect consumers with a new product or service. It’s a great way to enter a new market, draw attention to your product, and get some sales traction right from the beginning. It’s also an opportunity to pull customers into your store and increase potential for cross and upsells.
Because the initial risk for the consumer is low, more people are willing to “try and see.” If the product delivers on its promise, this introductory phase can be the start of a long-term relationship.
2. Influences Price Perception
Penetration is also a great way to influence your product’s price perception right from the start, regardless of whether you want to be seen as a high-end retailer or a value-for-money option. With careful marketing campaigns (and using tactics like odd even pricing, charm pricing, and others), you can build an image around your product value and tell a story that influences how the consumer sees your brand.
Handled well, the short-term low price does not automatically mean “cheap.” Instead, you can frame it as a launch offer, early access reward, or part of a broader brand narrative.
3. Shakes Up The Market
Penetration pricing is also a way of overhauling a market if there is an established leader. In many cases, “underdog” companies may enter a new market and sell a new product at a low price to attract customers away from an established product or service.
By temporarily undercutting incumbents, you can force them to react, gain disproportionate share of voice, and reposition yourself as a serious alternative. This is especially effective in categories where products are highly comparable and consumers are comfortable switching based on price alone.
While penetration pricing is an awesome strategy, it can be risky. If you don’t proactively account for the hazards of the strategy, it could be devastating.
1. Lack Of Perceived Value
Penetration pricing’s greatest strength — its ability to draw attention to your product amongst a sea of similar alternatives through aggressive pricing — is also its weakness. Dropping a price too low will leave consumers disgruntled when you begin to raise the price — they’ve anchored their value of the product on the low price, and may not return to purchase when you adjust your price to normal levels.
If the jump between the introductory price and the “real” price is too big, you risk backlash, negative reviews, and a sense that the brand is now “overcharging.”
2. Potential Race To The Bottom
Another disadvantage of market penetration pricing is the potential reaction from other sellers when you introduce a low price on the market. If competitors or other market players also lower their prices in response to your introductory offer, it could spark a race to the bottom. One way to protect against this race to the bottom is to use a dynamic pricing software and set a price floor that still leaves you with some margin.
Without clear guardrails, a penetration pricing strategy that was meant to be temporary can end up permanently eroding margins across an entire category.
3. Attracting Price-Sensitive, Non-Loyal Customers
Low introductory prices often attract bargain hunters who care more about price than about brand, experience, or long-term value. Once prices move up, many of these customers will simply switch again to the next low-priced alternative.
This means you must be realistic: not every customer gained in a penetration phase will stay when prices normalize. Your product, service, and brand must be strong enough to retain the right segment.
Penetration pricing is widely used in both digital and physical markets. Here are some classic penetration pricing strategy examples that illustrate how the concept works in practice.
An excellent example of a marketing penetration pricing strategy occurred in the Netherlands just a few months ago when Amazon.nl officially launched.
Amazon’s pricing strategy is notoriously aggressive and dynamic. The company is well-known for extremely frequent price changes and an ethos of providing the best customer experience in the world — which often coincides with rock-bottom prices. As a marketplace it carries almost any product you could want, but it delivers it at a price significantly lower than other retailers.
Upon launch, Amazon didn’t differ too much on its prices compared to other major online retailers in the Netherlands. But over the last few months, Amazon has competed heavily on price to drive traffic to its shop. Since most of the products on Amazon are highly elastic and offer lots of alternatives, it’s a smart strategy; it drives the average price down for most products on the store and solidifies Amazon’s price perception as the cheapest place to shop on the internet.
Amazon NL has also deployed the company’s most deadly weapon: Amazon Prime. Prime is one of the key drivers of Amazon’s webshop because of the brand loyalty it inspires. It’s so effective that 82% of US households have a Prime membership, according to a recent survey, and Prime members spend almost double the amount of non-Prime members every year. When consumers have a Prime account, their first thought when they need something is to go see if Amazon sells it. Amazon knows that once consumers become Prime members, they are unlikely to leave because of the convenience Amazon provides.
Prime is so critical to Amazon’s success that it was a clear part of Amazon’s Day One strategy in the Netherlands. At the time of launch (and at the time of this writing still), Dutch shoppers could try Prime free for 30 days. After the 30 day trial period, they’d only be billed €2,99 per month. This is a stark contrast to most markets, where Amazon Prime costs around €8 per month.
Amazon’s goal in the Netherlands is clear: they are coupling an aggressive market penetration pricing strategy with their exceptional loyalty program, all at a low risk for consumers.
Related: The Complete Guide to Selling on Amazon in 2020
In each of these penetration pricing strategy examples, the logic is the same: sacrifice early margin in exchange for reach, relevance, and customer acquisition.
A penetration pricing policy is most likely to be effective when the product is highly elastic and in markets where there is little difference between Product A and Product B. If consumers are both sensitive to price changes and if comparable products are virtually the same as yours, it’s the perfect breeding ground to make price the only differentiator.
Why? Because, according to basic economic theory, demand will increase if you drop your price. And if your product offers a better value-for-money promise, consumers will quickly buy your offering over an alternative.
Say you sell blenders, for example. The basic feature of all blenders is the same: they blend liquids. Some may have sharper blades. Some may have a nicer build quality. But for many consumers, these features don’t make much of a difference. What they want is something that will last a long time and do a great job blending up smoothies every morning — nothing more, nothing less.
If you wanted to introduce a new blender to the market, a market penetration pricing strategy may be a great way to get your brand noticed. If you can craft a thoughtful marketing campaign around your pricing strategy, you may be able to keep that attention and build brand recognition and perception. If you’re successful, future consumers won’t bat an eye at increased prices: they’ll know the value of the product.
The meaning of penetration pricing is a strategy where a company launches a product or service at a deliberately low initial price to quickly gain market share, attract price-sensitive customers, and build awareness in a competitive market. The low price is usually temporary and intended to be raised later once adoption and loyalty have been established.
The main objectives of a penetration pricing strategy are to:
The key advantages of penetration pricing include:
The main disadvantages of penetration pricing are:
Penetration pricing is primarily a short-term strategy designed to accelerate entry into a market. However, its effects can be long-term: it shapes brand perception, customer expectations, and competitive dynamics. The crucial part is having a clear plan for how and when to transition from introductory prices to sustainable, long-term pricing.
Price skimming and penetration pricing are opposite launch strategies:
Skimming is best for differentiated, innovative, or premium products. Penetration pricing is best for highly elastic, competitive markets where many alternatives already exist.
Use penetration pricing when:
Use price skimming when:
Common penetration pricing strategy examples include:
Penetration pricing can strengthen a brand’s “value-for-money” image if communicated as a temporary launch offer. But if prices are too low for too long, customers may start to associate the brand with “cheap” instead of “good value.” Managing messaging, duration, and the subsequent price increase is critical to protecting brand equity.
Retailers can reduce the risks of penetration pricing by:
Penetration pricing is a great way to take on a new market and get your product noticed. But make sure you’re careful in the execution. If done poorly, penetration pricing can harm your brand image rather than help it — and nobody wants that.
The most successful retailers understand penetration pricing advantages and disadvantages in detail, plan their exit from the low-price phase before they launch, and combine penetration pricing with strong products, clear positioning, and smart use of data. They also understand skimming vs penetration pricing and choose the approach that fits the product, the brand, and the competitive landscape — not just the theory.
Curious to learn about other pricing strategies or interested in our Amazon guide series? Check out some of our other articles below: