Price is one of the most important elements of the marketing mix. The cost of production and the profit margin that the business wants to charge its customers, which would be its main source of income, are both factored into the price of a product. Three factors are taken into account by a business when determining the price of its products, i e. cost, competition and consumer demand. Additionally, the pricing strategies are modified as the product progresses through its life cycle.
The initial stage, where the business must set the price of its new product for the first time, is the most difficult one in this regard. Companies have two options at this stage: the price-skimming strategy and the market-penetration pricing strategy. We will go into detail about these two tactics in this article.
In a pricing strategy known as penetration, a new product is released into the market at a low price in order to gain as much market share as possible. When deciding on a product’s price, the company adds a small markup to its cost of production. Due to the product’s low price, many customers are forced to purchase it, leading to high sales for the company. Consequently, even though the company’s profit margin is low, it can still make money by making more sales. The company’s ability to lower costs due to higher sales enables businesses to further reduce prices.
For goods that other brands are already selling on the market, businesses use penetration pricing. Customers who are already familiar with the products of other companies switch to the new product when their low-priced product is introduced to the market. Penetration pricing also discourages new entrants in the market. Competitors avoid the market when they can’t produce and distribute the good at such low margins, which enables the business to boost brand recognition.
When certain market conditions exist, the penetration pricing strategy is successful. First, the market should be very price sensitive, which means that when a product with a low price is offered on the market, customers switch to that product. Therefore, a low price would result in market expansion and attract a sizable number of customers Second, the company should be able to reduce its production and distribution costs with an increase in sales volumes, i e. there should be economies of scale. Last but not least, the low prices should be successful in eliminating competition from the market.
In this tactic, the product is initially sold for a high price with the goal of removing the “cream” from the market. The business targets customers who are willing to pay a high markup for the products and sets a high introductory price for them in order to make the most money possible quickly. In the beginning, the company sells fewer products, but the profit margin is high. The price gradually declines over time in order to appeal to the following market segment, i e. customers who are willing to purchase the expensive product at a discount
Certain prerequisites must be met in order to use a skimming price strategy. First of all, the item should be distinctive and include features that are novel to the market. Customers pay the high price for such a product because there are no alternatives on the market, and Second, the business must be able to maintain its uniqueness, i e. , product should not be copied easily by competitors. Finally, there should be a segment of the market that values unique products and wants to be the first to purchase them, so they are willing to pay more for them.
Skimmimg Pricing Vs Penetration Pricing
What is penetration pricing?
Prices are lowered as part of a strategy known as penetration pricing in order to draw in more buyers and expand the product’s market share. By using this strategy, you can enter the market quickly and develop a solid clientele. Short-term profits are lower, but a large number of early sales make up for the low margins. Finally, you can raise the price when demand is higher.
However, because the company doesn’t target customers willing to pay high prices, penetration pricing may continue to see limited profits. When launching a campaign with a low price, businesses risk losing customers to rivals once the price is increased. Companies frequently employ this tactic along with a low-cost structure, which means they lower costs in order to increase margins. By doing this, they are able to maintain low prices and retain their clientele.
What is price skimming?
Skimming gives rivals the chance to undercut your prices in an effort to win your business. A high-quality product is therefore necessary to keep your value-conscious customers interested.
Differences between skimming and penetration pricing
Skimming and penetration pricing strategies offer different benefits, including::
Skimming benefits
Price skimming can offer the following benefits:
Penetration pricing benefits
The penetration strategy offers the following benefits:
When to use skimming or penetration
Depending on what they want to maximize—market share, overall profit, customer lifetime value, or profit margin—companies choose skimming or penetration. Their choices may be affected by things like limitations on production capacity or the capacity for mass production. Their target audience and price elasticity may also have an impact on the strategy they choose.
When to use price skimming
The following scenarios call for using the skimming pricing strategy:
When to use penetration pricing
You might use penetration pricing in the following situations:
Examples
To help you understand the differences between penetration and skimming tactics, the following examples are provided:
Example of skimming strategy
A car manufacturer introduces an eight-cylinder, luxurious SUV with a number of cutting-edge features that are unmatched by any other vehicle on the market today. This model’s starting price is at its highest point. Because quality-conscious consumers and early adopters are eager to purchase the most recent SUV model as soon as it hits the market, the manufacturer anticipates demand to be high during the first year. The automaker then introduces another model that is similar to the high-end one a year later. It has only six cylinders and a lower price.
The automaker began by scanning the market and focusing on the market segment that was willing to pay more. It then targeted the next category of more budget-conscious customers.
Example of penetration strategy
A supermarket chain finds data demonstrating rising consumer demand for organic food. The manager is confident that many customers will purchase the company’s new organic products given its sizeable market share. The supermarket company begins selling organic food items at a lower price than its rivals because of its sizable customer base.
To sell organic goods for less, the supermarket chooses a penetration pricing strategy. The supermarket offers samples to customers and advertises fresh items. The supermarket makes money on its new organic goods because of high sales volumes and increased demand.
FAQ
What is the difference between skimming and penetration strategy?
Penetration pricing is a pricing strategy in which the firm initially sets a low price in an effort to draw in more and more customers. Skimming pricing refers to a pricing strategy whereby the business sets a high price for the product at the time of introduction in order to make the most money possible. Penetrate the market.
What is an example of price skimming?
Examples of price skimming When a product is first released, electronics like the Apple iPhone frequently employ a price skimming tactic. Then, after competitors launch rival products, i. e. , the Samsung Galaxy, the cost of the item decreases while maintaining its competitive advantage.
What is penetration pricing give an example?
Examples of penetration pricing include a bank offering a free checking account for six months or an online news website offering one month of a subscription-based service for free.
In what situation is skimming & penetration pricing strategy used give one example each?
Apple is a great example of a business using this tactic. With skimming, you target customers who are most likely to buy your product and set your prices high to maximize profits in the short term. Because only early and eager buyers are willing to pay more, you initially make fewer but more profitable sales.
