Penetration pricing

Penetration pricing is a pricing strategy where a business sets a low initial price for a new product or service and then gradually increases it over time. The low price is only the starting point: it is designed to rise once customers are established, so it is different from a strategy that keeps prices low for good.

Why a business does it

A low launch price aims to attract customers quickly. When a product is new, customers have no experience of it and may be unwilling to pay much, so a low price encourages them to give it a try. If they like it, some will stay loyal, and because they are already used to buying from that business many will accept the later price rise. Winning lots of customers early also helps the business build market share and establish a customer base before competitors react.

Worked example

A new hand car wash, SparkleWash, charges £4 a wash for its first two months and plans to put the price up to £7. If it washes 500 cars a month, it takes £2,000 a month at the low price. The same 500 cars paying £7 would bring in £3,500 a month. The gap shows the trade-off: the business earns much less per customer while the price is low, in the hope of keeping those customers once the price rises.

The drawbacks

Profits are low while the price is low, so the business needs enough cash to survive this period. There is also no guarantee that customers will stay when the price rises — some may switch to a rival or simply stop buying, so the business ends up with fewer customers than it planned and a price that is no longer a reason to buy from it.