ACCA Applied Skills · Performance Management · Pricing decisions
Which of the following conditions would make a market penetration pricing strategy MORE suitable for a new product?
Penetration pricing is more suitable where demand is highly elastic and economies of scale are significant. Low prices then stimulate large volumes, and unit costs fall as output rises, allowing the firm to gain market share and later earn profits at scale.
- ADemand is highly elastic and there are significant economies of scale in productionCorrect
- BThe product is protected by patents and has a loyal niche following
- CCustomers use price as an indicator of quality in a small market
- DBarriers to entry are high and competitors are unlikely to respond
Explanation
Penetration pricing works when demand is price elastic, so a low price boosts volume, and when economies of scale let unit costs fall as volume grows. The other options describe conditions that favour skimming: patents, niche, price-quality perception and high barriers to entry.
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