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Question
Enlist its advantages and disadvantages?
Solution
Advantages: Following are the advantages of penetrating pricing method:
- Quick rise in sales: Penetrating pricing results in the increase in sales with a very high speed.
- High turnover: The turnover of the enterprise is raised in very short duration. This strengthens the position of enterprise in the market.
- Return on investments: This method brings decent return on investments. The minimum profit margin is also assured with the sale of each unit.
- Best method for price elastic goods: When a small range in price brings more change in demand, such products have penetrating pricing as the best method.
Disadvantages: Following are the disadvantages of penetrating pricing method:
- This method is applicable only to the products and services, which have high price elasticity. Thus, it is not applicable to all the products.
- Profit margin is low in the price fixed by such method. This profit may not be sufficiently compared to the cost of production and promotion.
- Turnover of the enterprise increases tremendously. Such enterprises have to prepare themselves for a situation of more financial requirements.
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RELATED QUESTIONS
Explain the disadvantages of skimming price method?
What is penetration pricing method?
Explain in detail any three pricing strategies.
‘Polymer Ltd’ decided to diversify into manufacturing pipes and plastic household products apart from their water tanks business. Their finance and marketing department decided to adopt any of the two pricing strategies -
- adding a certain percentage of profit to the cost of production
- selling at a lesser amount so as to capture a huge market. They put forward their funding strategy to the CEO.
The suggested pricing strategies are:
- Cost-plus pricing
- Skimming pricing
- Penetration pricing
- Competitive pricing
Mayank, a small entrepreneur, is manufacturing LED lamps with the brand name 'Led-amps`". These lamps are in great demand. He finds that the cost of production per unit of the lamp is ₹ 800 and he can sell the same at ₹ 1000 per lamp. The competitors in the market are selling this type of lamp at the rate of 1200. Mayank's objective is not to earn profit in the short-run but to capture the largest market share. His expectation is that the customers will be attracted towards the new brand because of the lower price.
Identify the method of pricing adopted by Mayank to capture the substantial portion of the market.
| Mittal Industries is into manufacturing of television sets. The company decided to introduce a new range of smart television sets which can use any mobile phone as remote control. The finance department along with the R&D department brainstormed to arrive at an optimal price for the television sets. They decided that the price be fixed based on a manufacturing estimate. |
Enlist the advantages of fixing price in this manner.
