A penetration pricing policy is most likely to be effective when (1) __________; (2) a low initial price discourages competitors from entering the market; and (3) unit production and marketing costs fall dramatically as production volumes increase.
A)lowering the price has only a minor effect on increasing the sales volume and reducing the unit cost
B)the high initial price will not attract competitors
C)customers interpret the high price as signifying high quality
D)enough prospective customers are willing to buy immediately at the high initial price to make these sales profitable
E)many segments of the market are price-sensitive

Question

Quizplus · Accepted Answer

A penetration pricing policy is designed to attract price-sensitive customers who are willing to switch from competitors or try a new product at a low price. If many segments of the market are price-sensitive, then a penetration pricing policy is likely to be effective. The low initial price may discourage competitors from entering the market and unit production and marketing costs may fall with increasing production volumes, making it profitable for the company. If the lowering of price has only a minor effect on increasing sales volume and reducing unit cost, then penetration pricing may not be as effective. Additionally, if customers interpret a high price as a sign of high quality, then a penetration pricing policy may not be suitable.

A Penetration Pricing Policy Is Most Likely to Be Effective