New Product Pricing

NEW PRODUCT PRICING – PRICE SKIMMING OR PENETRATION PRICING? – PRICING IN THE INTRODUCTION STAGE

Price-Skimming – New Product Pricing

The first new product pricing strategies is called price-skimming. It is also referred to as market-skimming pricing. Price-skimming (or market-skimming) calls for setting a high price for a new product to skim maximum revenues layer by layer from those segments willing to pay the high price. This means that the company lowers the price stepwise to skim maximum profit from each segment. As a result of this new product pricing strategy, the company makes fewer but more profitable sales.

Many companies inventing new products set high initial prices in order to skim revenues layer by layer from the market. An example for a company using this new product pricing strategy is Apple. When it introduced the first iPhone, its initial price was rather high for a phone. The phones were, consequently, only purchased by customers who really wanted the new gadget and could afford to pay a high price for it. After this segment had been skimmed for six months, Apple dropped the price considerably to attract new buyers. Within a year, prices were dropped again. This way, the company skimmed off the maximum amount of revenue from the various segments of the market.

However, this new product pricing strategy does not work in all cases. Price-skimming makes sense only under certain conditions. The product’s quality and image must support the high initial price, and enough buyers must want the product at that price. Also, the costs of producing smaller must not be so high that they overshadow the advantage of charging more. And finally, competitors should not be in sight – if they are able to enter the market easily and undercut the high price, price-skimming does not work.

New Product Pricing – Price-Skimming vs. Market-Penetration Pricing

Market-Penetration Pricing – New Product Pricing

The opposite new product pricing strategy of price skimming is market-penetration pricing. Instead of setting a high initial price to skim off each segment, market-penetration pricing refers to setting a low price for a new product to penetrate the market quickly and deeply. Thereby, a large number of buyers and a large market share are won, but at the expense of profitability. The high sales volume leads to falling costs, which allows companies to cut their prices even further.

Market-penetration pricing is also applied by many companies. An example is the giant Swedish furniture retailer Ikea. By introducing products at very low prices, a large number of buyers is attracted, making Ikea the biggest furniture retailer worldwide. Although the low prices make each sale less profitable, the high volume results in lower costs and allows Ikea to maintain a healthy profit margin.

In order for this new product pricing strategy to work, several conditions must be met. The market must be highly price sensitive so that a low price generates more market growth and attracts a large number of buyers. Also, production and distribution costs must decrease as sales volume increases. In other words, economies of scale must be possible. And finally, the low price must ensure that competition is kept out of the market, and the company using penetration pricing must maintain its low-price position. Otherwise, the price advantage will only be of a temporary nature.

Penetration pricing is the market concept adopted for a new product to be launched in a market with low prices, so that it may penetrate in the market and can gain its position among-st the rivals. This strategy is implemented by the marketers for achieving the high ratio of sale for their new product by keeping it economical. By using this idea you can diffuse new product in a previously existed market in which there are huge rivals. You can keep your price low and compete in the market.

Applying this tactic you have to make huge promotion of the qualities of your new product, so that it can gain its place among competitors. This pricing strategy is usually adopted by local product producers and for local brands and is for the new entrants to endorse product by keeping initial price at fairly low rate to attract the consumers.

Most of the time this appeal is used by the manufacturers who enter in the market late, so this strategy is adopted by the late comers to compete baby boomers and already existing competitors.

Examples of Penetration Pricing Strategy

This price penetration strategy can be adopted by local surf brand by keeping its price low to already existing brands in the market. Although usually it is for normal consumable products like shampoo, soap about which consumers are not brand conscious and can switch by observing fluctuation in price. So it is applied by late comers or new comers to gain its position in the market.

A big example of the companies adopting penetration pricing strategy is UNILEVER. Along with using skimming strategy they also adopt penetration pricing strategy for some of their products like for LIFEBOY SHAMPOO AND SOAP. This is mostly implemented when company have to undergo basic requirements of life.

Conditions of Penetration Pricing

The conditions in which this strategy is mostly adopted are:

Penetration pricing approach is used to attain consumer attraction when market saturation condition is at its fullest.

It is also adopted when there is large number of alternative brands available for the same product to fulfill the need of the consumers so to attain its required space can use such pricing strategy.

It is adopted by the marketers for products about which consumers are price conscious and can control the market on basis of price.

It is for the price elastic demand products; the products for which there is direct relation with the price and consumer value their money by charging low price by modifying the price for the same product.

For the products upon which consumer decide upon the basis of price differentiation that what to adopt and what product to skip.

It is scheme used when in the market there is such adequate number of products that for your product life you have to manage on low earnings.

This price penetration is for the market when there is a chance that rivals already existing will also move to low prices in the coming time so have to adopt this pricing strategy for new product.

It is usually for the products expecting long life cycle as for the household items like soaps, shampoos and to achieve large market share and lock the market by moving with such strategy.

Why to focus Penetration Pricing

Penetration pricing is based on the intention to appeal big ratio of price sensitive customers far away from other rivals already existing in the market. The concept of marketing is based to make fusion of low price along with keeping the good product quality to resist the competitor’s product in market, so that they cannot further reduce their price low than your product to meet their unit cost. Penetration pricing is not for niche market as oppose to other marketing appeals rather it is focused to target large number of customers. You also have to focus on the good quality production of the product offering at low price, so that it can appeal the customer and can gain consumer trust.

Need for Penetration Pricing

There is need of penetration pricing as it is not to cover the choosy customers who are selective at time of purchase rather this scheme is designed to cover those customers who prefer low price based goods and services. At the time of shopping, they focus on items which have a bit low price as oppose to the other products of same kind available on the shelf. It is used to gain high volume sales and the life cycle chart of such products show rapid growth. We may also say this penetration pricing strategy is adopted in price sensitive market in which the demand fluctuates along with the changing price of the previously existed product.

What to Know Before Implementing Penetration Pricing Strategy

To implement such type of strategy so that it may work by decreasing competition at your end, instead of making it high, you have to consider few points:

Consider the goal for your profit with respect to the cost

Consider the customers you are targeting

The life cycle of a product

And the other rivals in the market

Conditions where price skimming desirable

Skimming policy is desirable in the following cases:

If a limited supply exists, the company may follow a skimming approach to match demand and supply.

Where the exporter wants to skim the cream before competitors enter the market.

Where a company wants to maximize its revenue.

When initial cost of production is very high which has to be recovered as early as possible.

Where the products are of specialty goods such as fashion-oriented goods.

Where the segment of the market is willing to pay a premium pricefor the value received.

Where the price and quality relationships are viewed favorably. High prices imply high quality for quality conscious customers.

Advantages of price skimming

Following are the important advantages of skimming the cream of the market.

1. High prices maximize the revenue available to the manufacturer.

2. Higher prices in the initial stage covers up development expenseswhich required to be incurred by the manufacturer.

3. Generally, it is easier to quote a higher price in the initial period and gradually reduce it to create a mass market for the product.

4. Skimming is advantageous where products are likely to become out of fashion within a short span.

5. As higher prices bring in large cash flows, funds will not be locked up. The exporter can employ the funds in other areas of market development.

6. Premium products are the status symbol for buyers in high income bracket.

Disadvantages of price skimming

1. High prices may not evoke quick sales.

2. As very few people buy the product, the brand loyalty of the product may suffer.

3. In the long run, people may shift their loyalty to low priced goods.

4. High profit margins lure competitors selling similar products.

5. Due to low demand for the product, economies of large scale production are not realizable.

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