in this article, we review the differences between price skimming and penetration pricing and look at examples to help you make an informed choice between the two options. penetration pricing is a strategy where prices are set low to attract new customers and increase the product’s market share. improved brand loyalty: in the midterm, penetration pricing allows you to build a strong and loyal customer base.
as the demand of the first customers is satisfied and competition enters the market, the firm lowers the price to attract another, more price-sensitive segment of the population. price skimming is often used when a new type of product enters the market. the goal is to gather as much revenue as possible while consumer demand is high and competition has not entered the market. this stage generally occurs when sales volume begins to decrease at the highest price the seller is able to charge, forcing them to lower the price to meet market demand.
the pricing strategy is usually used by a first moverfirst mover advantagethe first mover advantage refers to an advantage gained by a company that first introduces a product or service to the market. price skimming is not a viable long-term pricing strategy, as competitors eventually launch rival products and put pricing pressure on the first company. price skimming is used to maximize profits when a new product or service is deployed. in such a strategy, the goal is to generate the maximum profit in the shortest time possible, rather than to generate maximum sales. consider the diffusion of innovation, a theory that explains the rate at which a product spreads throughout a social system.
the way you price your products or services can be a reflection of your business’s identity, how you view and treat your competitors and how you value your customers. this involves some commercial soul searching — what do you want your business to contribute to the economy and world? there are dozens of ways you can price your products, and you may find that some work better than others — depending on the market you occupy. pricing for market penetration is essentially the opposite of price skimming.
this article suggests a pricing policy geared to the dynamic nature of a new product’s competitive status. market acceptance means the extent to which buyers consider the product a serious alternative to other ways of performing the same service. the problem at the pioneer stage differs from that in a relatively stable monopoly because the product is beyond the experience of buyers and because the perishability of its distinctiveness must be reckoned with. it is not uncommon and possibly not unrealistic for a manufacturer to make the blithe assumption at this stage that the product price will be “within a competitive range” without having much idea of what that range is. but in most cases the comparison is obfuscated by the presence of quality differences that may be important bases for price premiums. when the company has developed some idea of the range of demand and the range of prices that are feasible for the new product, it is in a position to make some basic strategic decisions on market targets and promotional plans. a basic factor in answering all these questions is the expected behavior of production and distribution costs. estimation of the costs of moving the new product through the channels of distribution to the final consumer must enter into the pricing procedure, since these costs govern the factory price that will result in a specified consumer price and since it is the consumer price that matters for volume. 2. launching a new product with a high price is an efficient device for breaking the market up into segments that differ in price elasticity of demand.