Initially, StreamFast sets its monthly subscription price at $4.99, which is significantly lower than the $12.99 and $8.99 offered by Netflix and Hulu respectively. To do this, it decides to implement a penetration pricing strategy. This new company, let’s call it “StreamFast”, wants to quickly attract a substantial user base and establish itself in the market. Let’s consider the example of a new video streaming service that enters a market dominated by well-established competitors like Netflix and Hulu. The strategy works best when the demand for the product or service is highly elastic, meaning customers are very price sensitive, and when the business can take advantage of economies of scale to maintain a profit at low prices. It’s important to note that the success of a penetration pricing strategy depends on the demand elasticity of the product or service and the business’s ability to scale. It can be an effective way to establish a customer base quickly, but it also carries the risk of a loss if the cost of the product or service exceeds the low price. This strategy is often used by new companies or for new products entering a market with established competitors. The initial low price helps the product or service “penetrate” the market quickly, hence the term “penetration pricing.” Once the product or service has gained enough attention or market share, or the promotional period ends, the business can then raise the price.

Penetration pricing is