What is a potential drawback of using penetration pricing?

Choosing penetration pricing as a strategy typically aims to gain market share quickly by offering products at a lower price point. While this strategy can be effective in attracting customers and establishing a foothold in a competitive market, it can also pose challenges for long-term profitability.

With penetration pricing, the initial low prices set can make it difficult to raise prices later without risking customer alienation. Consumers may become accustomed to low prices, leading them to perceive future price increases as unjustified, which can result in a loss of customer loyalty. Additionally, if the pricing strategy doesn’t account for cost structures, the resulting profit margins might be too thin to sustain the business in the long run. This challenge means that firms need to be cautious about transitioning from low price points to a profitable price level after achieving market penetration.

The effectiveness of penetration pricing hinges on balancing market share growth with ensuring that a feasible path to profitability remains in place, making it crucial to consider long-term business goals alongside initial sales strategies.