Q.
Pricing strategies usually change as the product passes through its life cycle. Companies can choose between these broad strategies: market-skimming pricing and market-penetration pricing.
a) Explain market-skimming pricing and market-penetration pricing. (10 marks)
b) Discuss why a company may want to use the marketing-skimming pricing rather than market-penetration pricing when launching a new product. (15 marks)
(20 marks, 2018 Q7)
A.
a) Market-skimming pricing vs market-penetration pricing.
Market-skimming pricing strategy
Price skimming is a pricing strategy in which a marketer sets a relatively high initial price for a product or service at first, then lowers the price over time.[1] It is a temporal version of price discrimination/yield management. It allows the firm to recover its sunk costs quickly before competition steps in and lowers the market price.
Price skimming is sometimes referred to as riding down the demand curve. The objective of a price skimming strategy is to capture the consumer surplus early in the product life cycle in order to exploit a monopolistic position or the low price sensitivity of innovators.[2]
- Price skimming is a product pricing strategy by which a firm charges the highest initial price that customers will pay. As the demand of the first customers is satisfied, the firm lowers the price to attract another, more price-sensitive segment.
Therefore, the skimming strategy gets its name from skimming successive layers of "cream," or customer segments, as prices are lowered over time.
Wikipedia search "Market-skimming", available at
http://en.wikipedia.org/wiki/Price_skimming
Market-penetration pricing strategy
Penetration pricing is a pricing strategy where the price of a product is initially set low to rapidly reach a wide fraction of the market and initiate word of mouth.[1]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 marketing objectives of enlarging market share and exploiting economies of scale or experience.[2][3]
SUMMARY: Market-skimming pricing is introducing at high price and gradually lower down the price whereas Market-penetrating pricing is introducing at lower price and slowly increase the price.
b) Reasons to choose market-skimming pricing strategy over market-penetration pricing when at new launch.
Pricing of a NEW product without much competitor/substitutes will enable the company to obtain good profit if it uses Market-Skimming Pricing Strategy. Product in this category are like high-tech high quality product. Over time, even if its price may gradually come down due to competition, it can still sustain a good profit margin.
Niche marketing is also the reason that could make Market-skimming pricing strategy a way of launching into a market segment. For example, a new handphone with special feature of water-proofing, would target the segment of users who are sports person (usually outdoor and in risk of getting wet). Hence, it could launch this highly water resistant handphone in a segment of market (youngsters who are sports persons), at a higher than normal price. Over the time, another similar type of water resistant handphone posts threat to its market share, then it could lower its price to defend its position.
Ref:
Own account.