A market penetration pricing strategy means setting the price of a product or service as low as possible to facilitate rapid sales. It is likeliest to succeed in large, growing markets and is most often used in new product introductions. A penetration price is generally chosen when the marketer's goal is to achieve high market share.
In many markets, consumer demand is elastic; in other words, people will buy more of a product the lower it is priced. A penetration pricing strategy creates a significant advantage for a firm that can identify and act on this type of price sensitivity. Penetration pricing often has the effect of blocking, or at least delaying, competition. In addition, it can help to lower per-unit costs of production when manufacturing processes are subject to economies of scale.
If sales volume fails to build as fast as projected in response to penetration pricing, a firm may have trouble recovering its research and development costs. Its overall profitability will suffer if it has produced far more than it can sell. Additionally, penetration pricing can hurt a brand's value image by suggesting to consumers that it is the cheapest -- not necessarily the best. This can unintentionally create a perceptual opportunity for competitors with higher-priced goods.
Some of the most successful practitioners of penetration pricing are retail discount operations, including warehouse, club and outlet stores. Particularly in a weak economy, these types of businesses compete much more heavily on price than on quality or other benefits. In the general merchandise category, Walmart is a leader in penetration pricing. In the grocery sector, the Aldi chain has pioneered this approach. Other examples can be found in categories like consumer electronics, furniture and toys.
Price skimming is the clearest alternative to price penetration. It is an attempt to create a perception of exclusivity and value by charging the most expensive price the market will bear. Many high-technology products, like smart phones and high-definition televisions, have been introduced at a skimming price that is steadily reduced as the item's novelty wears off. Another alternative is status quo pricing. Users of this strategy choose a price that is identical or closely comparable to competition. While not an aggressive approach, status quo pricing offers the benefit of low risk.