ACCA Performance Management (F5) Certification Practice Exam

What is a critical characteristic of penetration pricing?

1. Encourages high initial demand

2. Targets price-sensitive consumers

3. Utilizes competitive pricing method

4. Focuses on maximizing profits immediately

The correct answer is: Targets price-sensitive consumers

Penetration pricing is a strategy where products are introduced to the market at a low price to attract consumers and gain market share quickly. The critical characteristic of this approach is its emphasis on targeting price-sensitive consumers. By setting a lower price initially, businesses can appeal to those who are more likely to switch brands due to cost concerns, encouraging them to try the product despite potentially lower perceived value. This strategy is particularly effective in markets where consumers are sensitive to price changes, as it can stimulate initial sales volumes, allowing the company to establish a foothold in the market. Over time, the company may increase prices once a loyal customer base has been established and market share is secured, transforming initial low pricing into potential profitability. In contrast, encouraging high initial demand may happen as a result, but it is not the sole focus of penetration pricing. The competitive pricing method is not a defining feature of this strategy either, as penetration pricing is more about market entry rather than simply matching competitors. Finally, maximizing profits immediately contradicts the essence of penetration pricing, as the goal is to gain market share rather than short-term profits.