Explain market skimming and market penetration pricing strategies

This strategy means using lower initial price to capture a large market.

Pricing Strategies: Price Skimming and Penetration Pricing

However, Kroger and Costco use a penetration pricing strategy. As the price of the product is initially low in penetration pricing, huge quantities of product is sold by the firm. Also, if the low price is part of an introductory campaign, curiosity may prompt customers to choose the brand initially, but once the price begins to rise or levels with a competing brand, they may switch back to the competitor.

Both approaches have worked for businesses, but you have to understand how your price relates to your overall marketing and promotions strategies.

Penetration Pricing

As a result, many grocers offer more extensive selections of organic foods at premium prices to boost their profit margins. This strategy means using lower initial price to capture a large market. Skimming is more about operating with a high upfront price point that creates significant profit margin regardless of your cost basis.

A certain price level or threshold should be realised so that the estimated profits can be earned through break-even analysis. Otherwise, the price advantage will only be of a temporary nature. It entails fixing a high price for the new product before other competitors step into the market.

It is also referred to as market-skimming pricing. Price Skimming and Penetration Pricing Article shared by: Traditionally, the margin on groceries is minimal.

Finally, late adopters might be pleased to get your prestigious product at a bargain price, which creates goodwill for your company. It can create an aura of prestige around your product. Bulk quantities is sold because of low price. On the contrary, skimming pricing strategy is when a new product is launched in the market for which there is no competition.

Key Differences Between Penetration Pricing and Skimming Pricing The difference between penetration and skimming pricing are presented hereunder: Two new product pricing strategies are available: Once the competitors enter the market with a similar or a substitute product, the organisation reduces the price of the product to make it available for price sensitive customers.

Price Skimming A price skimming strategy focuses on maximizing profits by charging a high price for early adopters of a new product, then gradually lowering the price to attract thriftier consumers.

Kokemuller has additional professional experience in marketing, retail and small business. By offering a low market price and creating significant sales volume, you can order more products at once from distributors, often resulting in bulk discounts. The management should carefully monitor the price of the new product and they should be ready to make adjustments to the price in the best interest of the organisation, distributors, and customers.

Competitor Disruption Penetration pricing can prevent competitors from cutting into your market at lower price points. The price of this model was kept fairly low as compared to competitive products offering similar features.

Using skimming, they market products at high prices with relatively high margins. Under this strategy a high introductory price is charged for an innovative product and later on the price is reduced when more marketers enter the market with same type of product for example, Sony, Philips etc.

It offered it at so low price that it captured big share of mobile phone market. When sales to that group slow or competitors emerge, the company progressively lowers its price, skimming each layer of the market until the low price wins over even frugal buyers.

This strategy keeps the competitors away as the profit margins are low. To properly execute a penetration-pricing strategy, the sponge manufacturer first must gear up for mass production and then launch a sizable advertising campaign to publicize its new low-priced sponge.

Under this strategy a high introductory price is charged for an innovative product and later on the price is reduced when more marketers enter the market with same type of product for example, Sony, Philips etc. Both steps are expensive, so penetration-pricing strategies might not work well for small businesses.

If the product can be copied easily then price skimming will not bring revenue for a longer time. Example of Penetration Pricing Costco and Kroger, two major grocery store chains, use penetration pricing for the organic foods they sell.

Pricing Strategies: Price Skimming and Penetration Pricing

He has been a college marketing professor since The fluctuating demand in the market and the reaction of competitors can affect the pricing strategy negatively. Profits Companies not capable of achieving an industry-low cost structure may have a hard time earning profit at rock bottom prices with penetration pricing.

Price skimming

If the initial price is too high, you can lower it easily. The price skimming strategy cannot be used by every marketer. Penetration Pricing Penetration pricing occurs when a company launches a low-priced product with the goal of securing market share.

Penetration Pricing About the Author Neil Kokemuller has been an active business, finance and education writer and content media website developer since In the beginning, there is a huge requirement of capital for producing the product, resulting in high production cost.

A skimming pricing strategy is based on charging extras when a product is first released and passionate customers are willing to pay extra. Skimming offers the advantages of bringing in extra. Chapter 11 Discussing the Concepts 1. Compare and contrast market-skimming and market-penetration pricing strategies and discuss the conditions under which each is appropriate.

a. Market-skimming is setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price; the %(13).

Penetration pricing is a marketing strategy implemented to draw customers to a new product or service. Using skimming, they market products at. Jun 26,  · Penetration pricing and price skimming are marketing strategies commonly implemented when companies launch new products or services.

Both approaches have worked for businesses, but you have to. Knowing the difference between penetration pricing and skimming pricing will help you to choose the best pricing strategy for your product.

When a new product enters a market having no to little product differentiation, penetration pricing strategy is used. On the contrary, skimming pricing strategy is when a new product is launched in the market.

ADVERTISEMENTS: Some of the most important pricing strategies are as follows: 1. Price Skimming 2. Penetration Pricing 1. Price Skimming: Under this strategy a high introductory price is charged for an innovative product and later on the price is reduced when more marketers enter the market with same type of product for example, Sony.

Explain market skimming and market penetration pricing strategies
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