220 ENTREPRENEURSHIP
- It requires less analysis and research.
- It treats all buyers, early and late, the same.
- It reassures other firms that there is no threat of a price war.
The disadvantages are: - It requires the use of other marketing tools to gain differentiation.
- Its recovery on investment is slower.
- It is difficult to overcome errors in initial cost estimates.
Achieving maximum market penetrationis a strategy whereby the venture builds
market share as quickly as possible by entering with low prices. It stimulates market
growth. If this plan is successfully executed, the venture will be entrenched as the mar-
ket-share leader and positioned for long-term profitability. The low price implies low
margins, which will deter some competitors from entering. It is most useful in mass con-
sumer markets when:- The product has a long life span.
- There is easy market entry.
- Demand is highly price-sensitive.
- There is no “top” of the market to skim.
- There is some experience-curve effect.
The primary advantages of this strategy are: - It discourages entry of competitors.
- It focuses customers’ attention on value.
- It enables maximum penetration and exposure over a short time period.
Penetration pricing has a downside because: - It assumes a degree of price inelasticity that may not be present.
- It stimulates high volumes that the venture may not be prepared to meet.
- It requires large initial capital investment to meet high volumes.
- It is vulnerable to large losses if errors are made.
Establishing preemptive pricingis a “low ball” strategy designed to keep potential
competitors—or force existing competitors—out of the market. Prices are set as close to
expected variable costs as possible, and cost savings are passed on to buyers. Because
costs often decrease over time, initial prices will be below cost. Preemptive pricing is
often employed in consumer markets and is sometimes combined with other product-
pricing strategies that can help subsidize this potentially short-term money-losing poli-
cy. If this strategy succeeds, its major advantage is that it limits competition. If it fails,
however—if competitors match the low prices—losses can be enormous.
In addition to these strategies, numerous other pricing tactics are employed in vari-
ous situations. Table 6.4 offers a primer on creative pricing
Pricing policies also have legal implications and constraints. The Sherman Actpro-
hibits conspiracy in restraint of trade. Such conspiracy includes collusive pricing and price