Discuss the extent to which a new entrant in the computer manufacturing market will need to rely on penetration pricing to gain market share.
CAMBRIDGE
A level and AS level
Year Examined
May/June 2021
Topic
Pricing
👑Complete Model Essay
Penetration Pricing and Market Share in the Computer Manufacturing Market
This essay will discuss the extent to which a new entrant in the computer manufacturing market will need to rely on penetration pricing to gain market share. Penetration pricing involves setting a low initial price to attract customers and gain market share. This strategy can be effective in enticing customers away from competitors and establishing a foothold in the market.
Factors Favoring Penetration Pricing
In the context of computer manufacturing, penetration pricing might be particularly appealing for several reasons. First, the computer industry is characterized by rapid technological advancements and a constant influx of new products. A low price point can attract customers who are looking for the latest technology at an affordable price. For instance, a new entrant might target budget-conscious consumers or students with low-cost laptops, enticing them to try their brand.
Second, the computer manufacturing market is highly competitive, with established players holding significant market share. A new entrant needs a way to differentiate itself, and price can be a powerful differentiator. By offering lower prices, the new company can capture the attention of price-sensitive consumers and potentially lure them away from established brands.
Challenges and Limitations
However, relying solely on penetration pricing can be risky and may not be sustainable in the long run. One major challenge is the potential for a price war. Established firms, threatened by the new entrant's low prices, may retaliate by lowering their prices, squeezing profit margins for all. This is particularly relevant in the computer market, where profit margins are already thin due to intense competition.
Moreover, a low price might be perceived by consumers as an indicator of low quality, especially in the technology sector. Consumers often associate high prices with advanced features and superior performance. If the new entrant's computers are perceived as inferior, even a low price might not be enough to attract customers.
Furthermore, the computer manufacturing industry is characterized by high research and development costs. Sustaining low prices while investing in innovation can be challenging, especially for a new entrant with limited financial resources. A low-price strategy might hinder the company's ability to innovate and keep up with technological advancements in the long term.
Alternatives to Penetration Pricing
Instead of solely relying on penetration pricing, a new entrant in the computer manufacturing market might consider alternative strategies such as product differentiation. This could involve focusing on a niche market, offering unique features, or providing exceptional customer service. For example, the company could target gamers with high-performance gaming laptops or professionals with specialized workstations. By differentiating their products and targeting specific customer segments, the new entrant can command higher prices and avoid direct price competition with established players.
Conclusion
While penetration pricing can be a tempting strategy for a new entrant in the computer manufacturing market, it is not a guaranteed path to success and should not be the sole focus. The competitive nature of the industry, the importance of perceived quality, and the need for continuous innovation require a more nuanced approach. A combination of strategic pricing, product differentiation, and a focus on building brand reputation is likely to be more effective in achieving sustainable market share growth. Ultimately, the success of a new entrant will depend on its ability to offer compelling value to customers, whether through price, performance, or other differentiating factors.
Discuss the extent to which a new entrant in the computer manufacturing market will need to rely on penetration pricing to gain market share.
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Writing an A-Level Business Studies Essay: Penetration Pricing in Computer Manufacturing
This guide aims to help you write a compelling A-Level Business Studies essay discussing the extent to which a new entrant in the computer manufacturing market would need to rely on penetration pricing to gain market share. It will provide you with a framework for structuring your essay and address key points to consider.
Understanding the Essay Question
Before you begin writing, it's important to fully understand the question. The essay asks you to explore the extent to which penetration pricing is necessary for a new computer manufacturer. This means you need to consider both the potential benefits and limitations of this strategy in the context of a competitive market.
Essay Structure
Here's a suggested structure for your essay:
Introduction
Start by defining penetration pricing, explaining its rationale, and briefly outlining the characteristics of the computer manufacturing market.
Main Body
Arguments for Penetration Pricing
- Gaining market share quickly: Penetration pricing can attract price-sensitive customers, allowing the new entrant to gain a foothold in the market quickly.
- Discouraging competitors: Lower prices can force existing players to react, potentially leading to price wars that can benefit the new entrant.
- Building brand awareness: Early adopters may spread word of mouth about the product, leading to increased brand recognition.
Arguments against Penetration Pricing
- Negative impact on profit margins: Low prices may not cover production costs, leading to financial losses or delayed profitability.
- Perceived low quality: Consumers may associate low prices with inferior quality, potentially hindering brand image.
- Difficulties in price increases: Once customers are accustomed to low prices, increasing prices may be difficult.
- Limited impact on functional buyers: Many computer buyers prioritize functionality and features over price, making price alone an insufficient selling point.
Alternative Strategies
- Product differentiation: Offering unique features or functionalities can attract customers willing to pay a premium for value.
- Skimming pricing: Starting with a high price to capture early adopters and then gradually reducing it to reach a wider market.
- Value pricing: Emphasizing the value proposition of the product, highlighting its benefits and features rather than solely focusing on price.
Conclusion
Summarize your arguments and provide a clear answer to the essay question. Consider the following:
- The extent to which penetration pricing is essential for the new entrant's success.
- The potential risks and drawbacks associated with this strategy.
- The importance of a well-rounded strategy that considers both price and value.
Tips for Writing a Successful Essay
- Use evidence: Support your arguments with relevant examples from the computer manufacturing market. Consider companies like Dell, HP, Lenovo, or Apple.
- Analyze critically: Don't just state facts; analyze the implications of those facts and their impact on the new entrant's success.
- Balance your arguments: Present both sides of the argument, acknowledging the limitations of penetration pricing while also recognizing its potential benefits.
- Use clear and concise language: Avoid jargon or overly complex sentences.
- Proofread carefully: Ensure your essay is free of grammatical and spelling errors.
Conclusion
By following these guidelines and considering the specific context of the computer manufacturing market, you can write a strong A-Level Business Studies essay that thoroughly analyzes the effectiveness of penetration pricing for a new entrant. Remember to balance your arguments, use relevant evidence, and demonstrate your critical thinking skills throughout your analysis.
Extracts from Mark Schemes
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.
• 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.