New Entrant in Computer Manufacturing: Need for Penetration Pricing?

Discuss the extent to which a new entrant in the computer manufacturing market will need to rely on penetration pricing to gain market share. Knowledge and Understanding 2 marks • Clear understanding of penetration pricing • Clear understanding of market share Application 2 marks • Reference to manufacturing market Analysis 2 marks • Penetration pricing – entering a market with a low price in the hope of increasing prices later once customers have been gained. • This is a manufacturing business so customers might also be retailers, or the manufacturer might sell direct to customers. • Penetration pricing might succeed in drawing customers away from competitors with similar products or might encourage customers to try a new style of computer. • Computer industry is fast moving with a high level of technological development. • Competition is high regarding the level of technology/functions offered to customers. 12 9609/12 Cambridge International AS & A Level – Mark Scheme PUBLISHED May/June 2021 © UCLES 2021 Page 12 of 17 Question Answer Marks 5(b) • The success of penetration pricing might depend on the size of the competitor businesses and whether or not they react to this new entrant. • Can the new entrant put a low enough price on the computers? • Will a lower price make customers query the quality of the computers? • Using penetration pricing is likely to delay the return of research and development costs. • If the new entrant is smaller than its rivals it is unlikely to enjoy economies of scale and is therefore working with higher unit costs than other manufacturers. This is likely to make penetration pricing difficult to sustain over a longer period of time. • A higher price might give a perception of a product that offers the latest technology and functions and might be more likely to encourage customers to buy. Does high price always mean high quality? Evaluation 6 marks • A candidate should make a judgement as to the extent to which a new entrant in the computer manufacturing market will need to rely on penetration pricing to gain market share. • These judgements may be made at any point as well as in a concluding section. • The context is the computer manufacturing market. • Penetration pricing can work if purchase decisions are based on price, but purchasers of computers frequently make their purchase decisions based on the functionality and features rather than on price alone. • A key factor might be how the competitors react. Longer established businesses might react with lower price offers on their computers and due to their size, they are likely to be able to maintain the low prices longer than the new entrant. • Established business might not react – assume that the low price will indicate lower quality and therefore, most consumers will not be attracted. • Product differentiation might be a more successful approach to gaining market share rather than low prices.