Evaluating Factors for Penetration Pricing Success

A penetration price policy involves setting an initially low price for a new product to quickly attract a large customer base and gain significant market share.

The success of this strategy depends on several factors. Let's analyze which condition is not desirable:

Desirable Conditions for Penetration Pricing

• Price Elastic Demand: For a penetration strategy to work, demand for the product should be sensitive to price changes. This means the short-run demand elasticity should be greater than unity ($ \epsilon > 1 $). A low price will then lead to a proportionally larger increase in quantity demanded, driving market share gains. This condition is desirable.
• Economies of Scale: The potential to achieve economies of large scale production is highly beneficial. As production volume increases due to high demand stimulated by the low price, the cost per unit decreases. This makes the low price sustainable and profitable in the long run. This condition is desirable.
• Consumer Acceptance: The product must be readily accepted by the target market. Easy acceptance and adoption ensure that the low price effectively translates into high sales volume quickly. This condition is desirable.

Undesirable Condition Analysis

• Cross-Elasticity of Demand: Cross-elasticity measures the responsiveness of the demand for one product to a price change in another. For penetration pricing, the goal is often to attract customers from competitors. This is facilitated if the product has close substitutes, meaning a high cross-elasticity of demand. If the product has very low cross-elasticity, it implies it has few substitutes or is perceived as unique. In such a case, a low price might not be sufficient to lure customers away from existing, potentially preferred alternatives, thus hindering rapid market penetration. Therefore, very low cross-elasticity is not desirable for this specific strategy.

Conclusion

The success of penetration pricing relies on attracting volume through low prices. This is best achieved when demand is elastic and competitors' products are seen as viable alternatives (high cross-elasticity). Factors hindering this rapid customer acquisition, like very low cross-elasticity, are undesirable.