Apply penetration- or skimming pricing to expand your business

18.11.2020

Read more on how to apply penetration- and skimming pricing when your business is going abroad

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 did also apply this strategy when expanding their business. Based on this, your company should consider these types of 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 fulltime position, who controls the strategic pricing situation of the firm.

However, it is very important, that your firm dedicates time and resources to optimize and analyze prices. Price decisions should never be based on gut feelings and quick initiatives. It is crucial for your firm to 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, which is beneficial for your firm to apply, if you are 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, it is necessary that you have non or only a few competitors in the market.

  • Moreover, it is necessary that your customers associate your products with a high quality.

What is penetration pricing?

Penetration pricing is a price strategy, which is beneficial for 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 have 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.

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 tele-companies, when they are launching 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 of the products. By time, the price will decrease, as the demanded products and the competitive situation are increasing in the market.

Example on penetration pricing

Price penetration is mostly applied within the industry of convenience goods or among products, where the innovation degree is significantly low. Moreover, you can apply this approach if you are selling a subscription, to attract new customers through an introduction offer. However, the price will by time increase to follow the competitive situation in the market and to 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 for instant selling a subscription product. You are able to attract consumers, as the price you have decided for your products, are below the price, which the consumers are willing to pay.

The importance of price elasticity

It is relevant that you firm is aware of the price sensitive 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, then the consumers are not that price sensitive. The reason is, that the consumers are very loyal towards the brands they are buying products from. In this case, the market is affected by quality-conscious consumers. Thereby, your firm will in an inelastic market, 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, it is crucial that your firm 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 has to be aware of the competitors price position, in order to enter the market in the most effective way.

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, who are selling the same type of products as you. 

PriceShape offers a simple and useful software, where it is possible for your firm to 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.