Question Tag: Penetration Pricing

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  • 10 Marks

BMIS – Aug 2022 – L1 – Q4a – Finance, R&D and marketing strategies

Differentiates between penetration pricing and skimming pricing strategies and outlines the circumstances for their use.

Penetration pricing and Skimming pricing are the two main pricing strategies used by business organisations.

Required:

i) Differentiate between these two pricing strategies.
(4 marks)

ii) Outline THREE (3) circumstances for which each of these pricing strategies will be appropriate for use by a manufacturing company.
(6 marks)

i) Penetration Pricing vs. Skimming Pricing:

  • Penetration Pricing:
    This strategy involves initially charging lower prices for products to build sales volumes and increase market share. The goal is to attract a large number of customers quickly by offering the product at a lower price than competitors.
    (2 marks)
  • Skimming Pricing:
    This strategy involves initially charging high prices for products with the objective of recouping investments quickly. The price is later reduced as competitors enter the market or as demand from early adopters decreases.
    (2 marks)

ii) Circumstances for Use:

  • Penetration Pricing Strategy:
    1. When introducing a new product to the market to quickly gain market share.
    2. When the company aims to achieve economies of scale by increasing production volume.
    3. When targeting price-sensitive customers to maximize sales.
      (3 points @ 1 mark each = 3 marks)
  • Skimming Pricing Strategy:
    1. When the product is new and has little or no competition in the market.
    2. When the product has a high appeal to premium customers who are willing to pay more.
    3. When there is an anticipated high demand for the product due to its unique features or innovations.
  • 20 Marks

BMIS – April 2022 – L1 – Q2 – Finance, R&D and marketing strategies | The external environment

Discuss the benefits of penetration pricing, the difference between mission and vision statements, and economic factors influencing facility location in Ghana.

Vagen Ltd, a German automobile manufacturer, has completed building an assembly facility in Ghana to manufacture and sell vehicles in Ghana and in other African countries. For the company to gain a foothold in the African market, it carefully applied the penetration pricing strategy and developed clear mission and vision statements to facilitate successful operations in this new market.

Required:
a) Identify FIVE (5) benefits the company would derive from the penetration pricing strategy. (5 marks)
b) Explain the difference between the company’s mission and vision statements. (5 marks)
c) Explain FIVE (5) economic factors that might have influenced the management of the company to locate the assembly facility in Ghana. (10 marks)

a) Benefits of the Penetration Pricing Strategy:

  1. Increased Sales Volume: The adoption of the penetration pricing strategy would result in increased sales volume for the company. Charging lower prices for vehicles would motivate the target market to purchase more vehicles.
  2. Competitive Advantage: Penetration pricing enables the company to gain a competitive edge by attracting a large customer base quickly, which can help establish the brand in the market.
  3. Market Entry Barrier: By setting lower prices, the company can create entry barriers for potential competitors, discouraging them from entering the market.
  4. Economies of Scale: The increased production volume due to higher sales can lead to economies of scale, reducing the cost per unit and increasing profitability.
  5. Customer Loyalty: Penetration pricing can help build customer loyalty as buyers appreciate the affordability and may continue to purchase from the company even after prices rise.
    (5 points @ 1 mark each = 5 marks)

b) Mission and Vision Statements:

  • Mission Statement: The mission statement of a company describes its basic purpose of existence. It is a broadly framed but enduring statement that reflects the company’s core purpose, including the type of products or services it seeks to offer, the markets it aims to enter, and its approach to pricing.
  • Vision Statement: The vision statement, on the other hand, refers to the company’s strategic intent that guides how it allocates its energies and resources to achieve a desirable future. The vision statement outlines where the company aspires to be in the future, serving as a long-term goal.

Difference: The mission statement indicates what the company stands for currently, while the vision statement outlines where it desires to be in the future.
(5 marks)

c) Economic Factors for Locating Facility in Ghana:

  1. General Economic Stability: Ghana’s stable and growing economy compared to other countries in the sub-region might have influenced the company to establish its facility in Ghana.
  2. Income Levels: Increasing income levels in Ghana compared to other African countries may have motivated the company to locate its assembly plant in Ghana, as higher incomes lead to greater purchasing power.
  3. Inflation Rates: The relatively stable inflation rate in Ghana could have been a factor in the decision, as it provides a more predictable economic environment for long-term investment.
  4. Purchasing Power: Rising purchasing power in Ghana implies that more consumers can afford vehicles, making it an attractive market for the company’s products.
  5. Interest Rates: Declining interest rates on loans in Ghana could make it easier for consumers to finance vehicle purchases, encouraging the company to establish its facility in the country.
  6. Consumption Patterns: Changing consumption patterns, with a shift towards the purchase of new vehicles, might have influenced the decision to build the facility in Ghana.
  7. Favorable Trade Policies: Ghana’s favorable trade policies, including tax incentives for foreign investors, might have contributed to the decision to locate the facility in the country.
  8. Infrastructure Development: The availability of infrastructure such as roads, ports, and electricity may have been a significant factor in the decision to set up the assembly facility in Ghana.

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