National Evaluation Series (NES) Business Studies Practice Test

How can a company effectively enter a competitive market with new products?

1. By maintaining high prices to reflect quality

2. By utilizing innovative marketing strategies only

3. By using a penetration pricing strategy

4. By relying on established distribution channels

The correct answer is: By using a penetration pricing strategy

Employing a penetration pricing strategy is an effective approach for a company to enter a competitive market with new products. This strategy involves setting initial prices low enough to attract customers away from existing competitors, allowing the company to quickly increase its market share. Lower prices can stimulate demand, encouraging consumers to try the new product. Once the product gains traction in the market and builds a customer base, the company can gradually increase prices to improve profitability. This strategy is particularly beneficial in competitive markets where numerous alternatives exist. By offering lower prices initially, the company can differentiate itself from competitors and create a compelling value proposition for potential customers. It also fosters brand loyalty, as satisfied customers might be more willing to stick with the brand when prices eventually rise. In contrast, maintaining high prices to reflect quality might deter potential buyers who are comparison shopping in a price-sensitive market. Focusing solely on innovative marketing strategies without a complementary pricing approach may not achieve the desired market penetration if consumers perceive the cost as too high. Relying exclusively on established distribution channels can limit the reach and visibility of the new product, making it harder to establish a market presence effectively. Thus, penetration pricing serves as a targeted method to gain a foothold in competitive environments.