Published on: Mar 4, 2016
Transcripts - Pricingpenetrationorskimmingmodelofpricing 130516152221-phpapp01
Pricing , Skimming or Penetration Model
Lets Know What Is Pricing ..
Pricing is the process of determining what a company will receive
in exchange for its products.
Pricing is the manual or automatic process of applying prices to
purchase and sales orders, based on factors such as: a fixed
amount, quantity break, promotion or sales campaign, specific
vendor quote, price prevailing on entry, shipment or invoice
date, combination of multiple orders or lines, and many others.
Pricing is one of the four elements of the marketing mix, along
with product, place and promotion. Pricing strategy is important
for companies who wish to achieve success by finding the price
point where they can maximize sales and profits. Companies may
use a variety of pricing strategies, depending on their own
unique marketing goals and objectives.
Types of Pricing
Premium pricing strategy establishes a price higher than the competitors. It's a
strategy that can be effectively used when there is something unique about the
product or when the product is first to market and the business has a distinct
competitive advantage. Premium pricing can be a good strategy for companies
entering the market with a new market and hoping to maximize revenue during
the early stages of the product life cycle.
A penetration pricing strategy is designed to capture market share by entering the
market with a low price relative to the competition to attract buyers. The idea is
that the business will be able to raise awareness and get people to try the product.
Even though penetration pricing may initially create a loss for the company, the
hope is that it will help to generate word-of-mouth and create awareness amid a
crowded market category.
Types of Pricing
Economy pricing is a familiar pricing strategy for organizations that include Wal-Mart, whose
brand is based on this strategy. Aldi, a food store, is another example of economy pricing
strategy. Companies take a very basic, low-cost approach to marketing--nothing fancy, just
the bare minimum to keep prices low and attract a specific segment of the market that is
very price sensitive.
Businesses that have a significant competitive advantage can enter the market with a price
skimming strategy designed to gain maximum revenue advantage before other competitors
begin offering similar products or product alternatives.
Psychological pricing strategy is commonly used by marketers in the prices they establish for
their products. For instance, $99 is psychologically "less" in the minds of consumers than
$100. It's a minor distinction that can make a big difference.
What is Price Penetration and lets have a looks at its advantages ?
Penetration pricing is the pricing technique of setting a relatively low initial entry price, often
lower than the eventual market price, to attract new customers. The strategy works on the
expectation that customers will switch to the new brand because of the lower price. Penetration
pricing is most commonly associated with a marketing objective of increasing market share or
sales volume, rather than to make profit in the short term.
The advantages of penetration pricing to the firm are:
* It can result in fast diffusion and adoption. This can achieve high market penetration rates
quickly. This can take the competitors by surprise, not giving them time to react.
* It can create goodwill among the early adopters segment. This can create more trade through
word of mouth.
* It creates cost control and cost reduction pressures from the start, leading to greater
* It discourages the entry of competitors. Low prices act as a barrier to entry
* It can create high stock turnover throughout the distribution channel. This can create critically
important enthusiasm and support in the channel.
* It can be based on marginal cost pricing, which is economically efficient.
What can be the disadvantage of Penetration Pricing ? and appropriate places
to use this type of pricing ?
The main disadvantage with penetration pricing is that it establishes long term price
expectations for the product, and image preconceptions for the brand and company. This
makes it difficult to eventually raise prices. Some commentators claim that penetration pricing
attracts only the switchers (bargain hunters), and that they will switch away as soon as the price
rises. There is much controversy over whether it is better to raise prices gradually over a period
Price penetration is most appropriate where:
* Product demand is highly price elastic.
* Substantial economies of scale are available.
* The product is suitable for a mass market (i.e. enough demand).
* The product will face stiff competition soon after introduction.
* There is not enough demand amongst consumers to make price skimming work.
* In industries where standardization is important. The product that achieves high market
penetration often becomes the industry standard (e.g. Microsoft Windows) and other
products, whatever their merits, become marginalized. Standards carry heavy momentum
What is Price Skimming then ? Lets have a look at its advantages
Price skimming is a pricing strategy which companies adopt when they launch a new product,
in this strategy while launching a product company sets high price for a product initially and
then reduce the price as time passes by so as to recover cost of a product quickly.
An example of price skimming would be mobiles which are have some added features are sold
at higher prices and then prices began to decline as time passes by, another example of price
skimming would be 3D televisions which are right now being sold. Given below are some of the
advantages and disadvantages of price skimming –
Advantages of Price Skimming
* High profit margin. The entire point of price skimming is to generate an outsized profit margin.
* Cost recovery. If a company competes in a market where the product life span is short, price skimming
be the only viable method available for ensuring that it recovers the cost of developing products.
* Dealer profits. If the price of a product is high, then the percentage earned by distributors will also be high,
which makes them happy to carry the product.
* Quality image. A company can use this strategy to build a high-quality image for its products, but it must
deliver a high-quality product to support the image created by the price.
Disadvantages faced by Price Skimming ?
Disadvantages of Price Skimming
The following are disadvantages of using the price skimming method:
* Competition. There will be a continual stream of competitors challenging the seller's extreme
price point with lower-priced offerings.
* Sales volume. A company that uses price skimming is limiting its sales, which means that it
cannot lower costs by building sales volume.
* Consumer acceptance. If the price point remains very high for too long, it may defer or entirely
prevent acceptance of the product by the general market.
* Annoyed customers. Early adopters of the product may be highly annoyed when the company
later drops its price for the product, thereby generating bad publicity and a very low level of *
* Cost inefficiency. The very high profit margins engendered by this strategy may cause a
company to avoid making the cost cuts required to keep it competitive when it eventually
lowers its prices.
Lets all have a quick glance at the summary ?
Q ) As the president of new high definition television company,
you must decide between a penetration or skimming pricing policy.
explain the factors you would consider in making your choice
For the above mentioned question , I would go with price skimming method as
it’s the best choice for a new product entry . Best choice for an innovative kind of
We will be able to “ skim the cream off the market “ by Initial high price
Later on, the mass market can be tapped by lowering the price. If there are doubts
about the shape of the demand curve for a given product and the initial price is
found to be too high, price may be slashed. However, it is very difficult to start low
and then raise the price. Raising a low price may annoy potential customers.
Factors for choosing Skimming are
The price will be at the top of the demand curve .
Price elasticity is low.
Cross-elasticity is also low.
Absence of close substitutes in initial stage helps reap profits .
Thank You and God Bless