Which pricing approach involves pricing a new product lower than competitors to gain early market share?

Which pricing approach involves pricing a new product lower than competitors to gain early market share?

• A. Penetration pricing
• B. Cost plus pricing
• C. Product life cycle
• D. Sponsorship

Answer: (A)

Penetration pricing is about setting a new product’s price lower than rivals to win early market share. By charging a low price, a firm attracts price-sensitive customers, rapidly builds sales volume, and can deter competitors from entering or quickly catching up because the initial profits per unit are smaller. The goal is to establish a strong market presence and a large customer base, which can later support price stability or gradual increases once demand is established or economies of scale reduce costs. This differs from cost-plus pricing, which simply adds a markup to cost regardless of competitors’ prices; from product life cycle considerations, which map sales over time rather than prescribe a pricing tactic; and from sponsorship, which is about funding marketing activities rather than setting prices to outcompete others.

Penetration pricing is about setting a new product’s price lower than rivals to win early market share. By charging a low price, a firm attracts price-sensitive customers, rapidly builds sales volume, and can deter competitors from entering or quickly catching up because the initial profits per unit are smaller. The goal is to establish a strong market presence and a large customer base, which can later support price stability or gradual increases once demand is established or economies of scale reduce costs.

This differs from cost-plus pricing, which simply adds a markup to cost regardless of competitors’ prices; from product life cycle considerations, which map sales over time rather than prescribe a pricing tactic; and from sponsorship, which is about funding marketing activities rather than setting prices to outcompete others.