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Price skimming and price penetration are the strategies that companies utilize when they launch a new product or service. Both the strategies are followed to explore business and reach the hearts of people, but the choice of a strategy depends on how the company wishes to relate the price with the strategies of overall marketing and promotion tasks.
Penetration pricing strategy works on low upfront pricing technique to attract the customers whereas skimming pricing strategy works on high-upfront prices that further focuses on a group of interested and eager customers in order to maximize short term profit.
Price skimming strategy
It is a kind of strategy that markets use by putting high initial prices for their products or services, and then lowering the price at later stages. It helps a company to recuperate the sunk cost before the actual competition steps into the market and the market price gets lower. This strategy first focuses on the interested customers and when one group of customers (or interested customers) gets satisfied, the price of the product or service is lowered to attract other customers. This strategy is generally adopted by the organizations when a technological product is to be launched in the market. In such a scenario, the top segments are willing to pay high prices for the product and when the product attains name and fame or a maturity level with the market, the price is then lowered by the company. This strategy remains in demand when a luxurious car or a new electronic product like a computer system, smart phone, printer etc. is introduced within the market. Price of such products remains at a high level until some other more advanced, developed or luxurious good of improved quality is introduced.
Price penetration strategy
This is a pricing strategy that is utilized by the companies where they initially set lower prices for the product, and after reaching out to maximum number of customers by creating word of mouth publicity and attaining fame, the price may or may not be increased with time depending on the competition or position in the market place. This strategy provides a number of advantages to an organization. This strategy helps a company or brand to attain goodwill among early adopters that further help in the growth of the name and fame of the brand with the help of word of mouth. It makes a particular brand to penetrate the whole market with its lower price which results in fast diffusion. On the other hand, this strategy doesn’t allow entry of any competitor as low prices act as barrier for other companies. This strategy is utilized by the companies when the product faces competition just after entering the market or when demand doesn’t suit the price skimming strategy. This strategy is also beneficial in situations where the product is initially sold at lower price, but its replacements are sold in the market at higher prices.
For instance, a printer can be sold at low price but its replacements – ink cartridges are sold at a higher price. This tactic allows companies to earn more on the single replacement(s) as compared to a complete product that further covers all the prices.
The major disadvantage of using this strategy is that the price expectations of the customers from the brand as well as the image of the company make it difficult for the company to raise the product’s price. And if the price is raised, the chances of the company to switch away from the market segment become higher.
Therefore, companies following this strategy need to work hard for attaining stability.
MakeMyAssignments will let you know how price skimming strategy is different from price penetration strategy. Though both the strategies are utilized to enhance business, there exist some basic differences between both the strategies that allow the use of these strategies at different times.
Growth factor: Since price penetration strategy works at low upfront pricing, its motive is to reach maximum customers while offering products at lower price and leaving behind the competing brands. Thus, the growth of the brand continues for a longer time. This growth is not in the case of price skimming strategy, where the strategy focuses on selected customers for gaining recovery of the cost of the company.
Competition and competitors: Price penetration strategy doesn’t allow any competitor to snatch the brand value of a company. If a company has set its products at a lower price with reasonable quality, then it will create a hindrance for other companies to compete.
On the contrary, the price skimming strategy is open to any competitor as this strategy aims to provide short-term profit to the company. A more qualitative and superior product can defeat a high price product (already introduced) of the same segment which further tends to attract selective customers of the same market segment.
Profit making factor: Price skimming strategy allows companies to fill their pockets with profit. While setting or maintaining higher prices for the product until another product comes in the same market segment, price skimming strategy makes a company to earn steady long-term profit. Penetration pricing strategy makes it difficult for companies to create changes in the pricing strategies as customer’s demand doesn’t allow such change without decreasing the brand value. Thus, companies following price penetration strategies go through a hard time in order to earn instant or long term profits.
Cost factor: Price skimming strategies allow companies to earn a good amount of profit. Whereas, in order to increase the sale of the product, companies utilizing penetration strategy offer their low priced products in combinations. This allows distributors to purchase a bulk of products at once while benefiting themselves with huge discount.
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