As mentioned previously, penetration pricing is used when a seller wants to quickly capture a large share of the market. It is based on the assumption that a lower price is perceived as providing a better deal.
For a penetration pricing strategy to work, a company needs to conduct thorough market research and see how much competitors are charging for a product with similar features/functionality. The new product is then sold at a significantly lower price, even if the profit falls below an acceptable level.
The goal of penetration pricing is to attract as many consumers as possible before competitors can react by cutting prices even further. Typically, this is a short-term pricing strategy because sooner or later, the seller has to return prices back to a competitive level. As a result, it might repel customers and force them to switch to competitors’ offers. Therefore, when the penetration strategy is no longer effective, companies need to promote other aspects of their products (such as quality or service).