A market penetration pricing strategy is suitable when
the production and distribution costs fall with increasing production.
Market penetration pricing sets a low introductory price to win a large market share quickly. It is worth doing only when the volume gained actually translates into profit, so the conditions favouring it concern cost behaviour and demand sensitivity.
It is suitable when production and distribution costs fall with increasing production. This is the crucial condition, because the strategy works through a virtuous circle: the low price attracts high volume, the high volume brings economies of scale and experience-curve savings, unit costs fall, and the low price therefore becomes profitable and sustainable. Without falling costs the firm would simply be selling a great deal at a thin or negative margin.
Penetration also requires demand to be price sensitive, that is elastic, so option (B) is wrong - with inelastic demand a low price would not generate the extra volume the strategy depends on, and the firm would sacrifice revenue for nothing.
Option (A) is wrong because a low price is meant to discourage competitors, not encourage them; keeping the price and margin low makes the market unattractive to entrants. Option (D) describes the reasoning behind a different strategy altogether - a high price is the essence of price skimming, and in any case a high price usually attracts rather than discourages entry.
Hence penetration pricing is suitable when production and distribution costs fall with increasing production.
Similar Questions
Find the most appropriate sequence of life-cycle of price for a product, from the initial stage to the mature stage.
After determining its pricing objectives, what is the next logical step a company should take in setting its pricing policy ?
The practice of selling below cost, with an intention to destroying the competitor is referred to as :
Select the correct sequence of steps in setting a pricing policy:
(a) Determining Demand
(b) Analysing competitors' costs, prices and offers
(c) Selecting the Final Price
(d) Selecting the Pricing Objective
(e) Estimating costs
(f) Selecting a pricing method
Codes:
The price setting method most closely corresponding to the concept of product positioning is:
A company prices a 2 litre bottle of its mineral water at ₹ 30 but 60 ml of the same water in a moisturizer spray for ₹ 75. This is an example of which one of the following pricing practices?
Pricing decisions are most complex at which stage of the product life cycle?
Match the items of the following two lists and indicate the correct code:
List - I List - II a. Trade channel discounts i. Oligopoly pricing b. Tie-up sales ii. Locational price differentials c. Price being non-responsive to changes in demand costs iii. Differential pricing d. Basing-point pricing iv. Product-line pricing Match the following:
List - I List - II (a) Customer-segment pricing (i) Pricing products differently but not proportionately to their costs (b) Product-form pricing (ii) Pricing products differently even though the cost of offering at that arena is the same (c) Location pricing (iii) Pricing differently even though the products are the same (d) Time pricing (iv) Pricing differently for the different seasons Arrange the following step of pricing process in a logical order :
A. Analyse competitiors’ price
B. Estimate demand and revenue
C. Select pricing method
D. Assess pricing objectives
E. Determine Cost
Choose the correct answer from the options given below :
Important Questions from Pricing decisions
Pricing practice of setting a price target and then developing a product that would allow the firm to maximise total profit at that price is called:
Which of the following is the characteristic of price?
In which of the following price adjustment strategies. a company reduces prices to reward customer responses such as volume purchases, paying early or promoting the product?
The consumer's price sensitivity is / are influenced by
A. Who bears the cost
B. What percentage of total expenditure does the product represent
C. Who bears the cost and type of retailer from where customer purchases
D. Consumption of product by the customer
E. Knowledge about the product
Choose the most appropriate answer from the options given below:
- Which of the following are the informal pricing methods ?
I. Cost plus
II. Competitive
III. Rate of return
IV. Trial and error
Codes :
