ACCA Performance Management (F5) Certification Practice Exam

What is the principal of penetration pricing strategy?

1. Charging a low price to quickly gain market share

2. Setting high price for luxury items

3. Adopting higher prices for limited editions

4. Charging variable prices based on demand

The correct answer is: Charging a low price to quickly gain market share

The principle of a penetration pricing strategy revolves around the concept of entering a market with a low price point to attract a large consumer base quickly. This approach is designed to encourage customers to try the new product or service, thereby increasing its market presence and volume of sales rapidly. By setting lower initial prices, businesses aim to lure customers away from competitors and establish a foothold in the market. Once a significant market share is secured, the company may then consider gradually increasing prices once customer loyalty is built or once the product is established in consumers' minds. This strategy is particularly effective in markets where price sensitivity is high, or where there are numerous competitors offering similar products. This initial lower price can also create barriers for potential entrants in the market, as it can deter them from competing in a space where established players have already gained a strong foothold. The other options highlight different pricing strategies such as premium pricing for luxury items, variable pricing based on demand, and higher pricing for limited editions, which do not align with the objectives or methodology of penetration pricing. Penetration pricing distinctly focuses on quantity and market share rather than positioning or exclusivity.