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CMA Final · Strategic Cost Management · Pricing Decisions and Strategies

Ganga Foods launches a new snack using penetration pricing. Which situation most strongly supports choosing penetration pricing over skimming?

Penetration pricing is best supported when demand is highly price-elastic and economies of scale lower unit cost as volume grows. A low price then wins share quickly and is sustained by falling costs. Inelastic demand, patents, entry barriers and premium niches favour price skimming instead.

  1. ADemand is highly price-inelastic and the product is patented
  2. BDemand is highly price-elastic and economies of scale reduce unit cost as volume growsCorrect
  3. CCompetitors cannot enter the market for several years
  4. DThe product targets a small group of premium buyers

Explanation

Penetration pricing sets a low initial price to gain share quickly, which works when demand is elastic and unit costs fall with volume. The other options (inelastic demand, entry barriers, premium niche) favour skimming.

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