In a study focusing on 663 new products, especially two pricing strategies were in focus. In 20% of the cases, skimming pricing was applied by the companies to enter into new markets. The same was valid for penetration pricing, as 20% of the companies also applied this strategy when expanding their business. Based on this, your company should consider these pricing strategies when launching new products or going abroad.
Experts are acknowledging that companies are often underestimating the need of prioritizing resources for price analysis. A statistic shows that less than 5% of 500 companies prioritize a full-time position, which controls the strategic pricing situation of the firm.
However, your firm must dedicate time and resources to optimize and analyze prices. Price decisions should never be based on gut feelings and quick initiatives. Your firm must apply long-term-oriented goals to optimize your profit. Moreover, it is important to notice that consumers are affected by psychological biases.
Agenda:
- What is skimming pricing?
- What is penetration pricing?
- Examples on skimming pricing
- Examples on penetration pricing
- The importance of price elasticity
What is skimming pricing?
Price skimming is a popular price strategy that is beneficial for your firm if you are a first mover in a new market. The idea is to maximize your profit by setting a high entry price on the new products you are selling. To make this strategy a success, you need to ensure that the following factors are applied.
- To achieve market shares, you must have non or only a few competitors in the market.
- Moreover, your customers must associate your products with high quality.
What is penetration pricing?
Penetration pricing is a price strategy that benefits your firm if you want to enter a market quickly and achieve a high market share. The idea is to enter the market by applying a low price on your products. To apply this strategy in the best way, your firm has to consider the following factors beforehand.
- This strategy is often applied in a competitive market, where price is crucial for a purchase.
- If the market you are entering is affected by a high degree of customer loyalty, then price penetration can be a disadvantage for your firm. The reason is, that the consumers have a preferred reseller, which they are buying their products from. This happens even though your product is cheaper on the market.
A short comparison of the two pricing strategies:
The graph compares price skimming and penetration pricing. It can be seen that the entry price is very high when applying price skimming. On the other hand, it can be seen that the entry price for penetration pricing is relatively low.
Example on skimming pricing
Price skimming is especially applied in the technology industry. It is a relevant entry strategy for phone companies when they launch new products at a high price. However, the price will during the time be reduced to reach a wider segment. Imagine the following example.
- A new mobile phone is launched in the market at a price of $800. The demanded number of the product is in the beginning at 4000 mobile phones.
- After 1/2 year the price has been reduced to $400. The demanded number of the product has increased to 8000.
The example shows a typical pricing strategy applied within the technology industry. It can be seen in the graph that the price is following the demand for the products. Over time, the price will decrease as the demanded products and the competitive situation increase.
Example on penetration pricing
Price penetration is mostly applied within the industry of convenience goods or products, where the innovation degree is significantly low. Moreover, you can apply this approach if you sell a subscription to attract new customers through an introductory offer. However, the price will, over time, increase to follow the competitive situation in the market and increase your market shares. Imagine the following example.
- A new package of TV-channels is launched to the subscription price of $30 per month. The demanded number of products are at this point at 1000 products.
- By time, the price is increased to $60 per month. The demanded number of products will in this case decrease to 400 products, as this price has increased.
Based on the above, you can apply price penetration as an entry mode to reach new customers if you are instantly selling a subscription product. You can attract consumers, as the price you have decided for your products is below the price that the consumers are willing to pay.
The importance of price elasticity
It is relevant that your firm is aware of the price sensitivity in the market. If the market is affected by elastic products, then the consumers are very price sensitive. In this case, the consumers will decide to buy their products from the reseller who has the cheapest option. Consumers are only focusing on price and not the specific company brand. In this situation, the most optimal pricing strategy for your firm is to apply price penetration. The reason is that you are attracting consumers, as you are selling your products at a low price.
On the other hand, if the market is affected by inelastic products, consumers are not that price sensitive. The reason is that the consumers are very loyal to the brands they are buying products from. In this case, the market is affected by quality-conscious consumers. Thereby, in an inelastic market, your firm will benefit from applying price skimming as an entry mode to expand to a new market.
How can dynamic pricing optimize your choice of pricing strategy?
As explained, your firm must prioritize its price position in the market. It is especially an advantage if you are planning to expand to new areas. You can, in this situation, apply price skimming or penetration pricing, depending on the need in the market. To succeed, your firm must be aware of the competitors' price position to enter the market most effectively.
A way to monitor the competitive situation of the market and at the same time ensure a complete overview is by applying dynamic pricing strategies. You can, through different price comparison tools, get access to this type of knowledge. This tool can also provide you information on different competitors selling the same type of products as you.
PriceShape offers a simple and useful software where your firm can apply dynamic pricing. Moreover, you can get an overview of your competitors’ price positions and different shopping feeds. This will ensure that you are well prepared to choose the most optimal pricing strategy for your firm.
