Market Penetration Pricing Strategy

Market penetration pricing is a pricing strategy in which a company sets a relatively low price for its product or service in order to gain a larger market share and attract more customers. This strategy is suitable in certain situations, and option C correctly identifies one of those situations. Let's analyze why the production and distribution costs falling with increasing production make market penetration pricing suitable.

Explanation:

Production and Distribution Costs
- When a company produces and distributes a product, there are certain costs involved. These costs include raw materials, labor, transportation, packaging, and other overhead expenses.
- As the production volume increases, companies can benefit from economies of scale. This means that the average cost per unit decreases with higher production levels. For example, purchasing raw materials in bulk can result in lower prices, and spreading fixed costs over a larger number of units can reduce the cost per unit.
- When production and distribution costs decrease with increasing production, it becomes feasible for a company to set a lower price for its product without compromising profitability.

Market Share and Competitive Advantage
- By setting a lower price, companies can attract more customers and increase their market share. This is particularly effective when the demand for the product is elastic, meaning that customers are sensitive to price changes. Lower prices can incentivize customers to switch from competitors to the company offering the lower price.
- Increasing market share can also provide companies with a competitive advantage. It allows them to achieve economies of scale, negotiate better deals with suppliers, and invest in research and development to improve their products or develop new ones.

Discouraging Competitors
- Option D suggests that a high price discourages competitors from entering the market. While this can be true in some cases, it is not the main reason why a market penetration pricing strategy is suitable.
- The primary goal of market penetration pricing is to attract customers and gain market share, rather than to discourage competitors. However, by offering a lower price, companies may make it more difficult for new competitors to enter the market and establish themselves.

In conclusion, a market penetration pricing strategy is suitable when the production and distribution costs fall with increasing production. This allows companies to set a lower price, attract more customers, increase their market share, and potentially discourage new competitors from entering the market.