Pricing , penetration or skimming model of pricing
Published on: Mar 4, 2016
Transcripts - Pricing , penetration or skimming model of pricing
Pricing , Skimming or Penetration Model
Lets Know What Is Pricing ..• Pricing is the process of determining what a company will receivein exchange for its products.• Pricing is the manual or automatic process of applying prices topurchase and sales orders, based on factors such as: a fixedamount, quantity break, promotion or sales campaign, specificvendor quote, price prevailing on entry, shipment or invoicedate, combination of multiple orders or lines, and many others.• Pricing is one of the four elements of the marketing mix, alongwith product, place and promotion. Pricing strategy is importantfor companies who wish to achieve success by finding the pricepoint where they can maximize sales and profits. Companies mayuse a variety of pricing strategies, depending on their ownunique marketing goals and objectives.
Premium Pricing• Premium pricing strategy establishes a price higher than the competitors. Its astrategy that can be effectively used when there is something unique about theproduct or when the product is first to market and the business has a distinctcompetitive advantage. Premium pricing can be a good strategy for companiesentering the market with a new market and hoping to maximize revenue duringthe early stages of the product life cycle.Penetration Pricing• A penetration pricing strategy is designed to capture market share by entering themarket with a low price relative to the competition to attract buyers. The idea isthat the business will be able to raise awareness and get people to try the product.Even though penetration pricing may initially create a loss for the company, thehope is that it will help to generate word-of-mouth and create awareness amid acrowded market category.Types of Pricing
Economy Pricing• Economy pricing is a familiar pricing strategy for organizations that include Wal-Mart, whosebrand is based on this strategy. Aldi, a food store, is another example of economy pricingstrategy. Companies take a very basic, low-cost approach to marketing--nothing fancy, justthe bare minimum to keep prices low and attract a specific segment of the market that isvery price sensitive.Price Skimming• Businesses that have a significant competitive advantage can enter the market with a priceskimming strategy designed to gain maximum revenue advantage before other competitorsbegin offering similar products or product alternatives.Psychological Pricing• Psychological pricing strategy is commonly used by marketers in the prices they establish fortheir products. For instance, $99 is psychologically "less" in the minds of consumers than$100. Its a minor distinction that can make a big difference.Types of Pricing
What is Price Penetration and lets have a looks at its advantages ?Penetration pricing is the pricing technique of setting a relatively low initial entry price, oftenlower than the eventual market price, to attract new customers. The strategy works on theexpectation that customers will switch to the new brand because of the lower price. Penetrationpricing is most commonly associated with a marketing objective of increasing market share orsales volume, rather than to make profit in the short term.The advantages of penetration pricing to the firm are:* It can result in fast diffusion and adoption. This can achieve high market penetration ratesquickly. This can take the competitors by surprise, not giving them time to react.* It can create goodwill among the early adopters segment. This can create more trade throughword of mouth.* It creates cost control and cost reduction pressures from the start, leading to greaterefficiency.* It discourages the entry of competitors. Low prices act as a barrier to entry* It can create high stock turnover throughout the distribution channel. This can create criticallyimportant enthusiasm and support in the channel.* It can be based on marginal cost pricing, which is economically efficient.
What can be the disadvantage of Penetration Pricing ? and appropriate placesto use this type of pricing ?The main disadvantage with penetration pricing is that it establishes long term priceexpectations for the product, and image preconceptions for the brand and company. Thismakes it difficult to eventually raise prices. Some commentators claim that penetration pricingattracts only the switchers (bargain hunters), and that they will switch away as soon as the pricerises. There is much controversy over whether it is better to raise prices gradually over a periodof yearsPrice penetration is most appropriate where:* Product demand is highly price elastic.* Substantial economies of scale are available.* The product is suitable for a mass market (i.e. enough demand).* The product will face stiff competition soon after introduction.* There is not enough demand amongst consumers to make price skimming work.* In industries where standardization is important. The product that achieves high marketpenetration often becomes the industry standard (e.g. Microsoft Windows) and otherproducts, whatever their merits, become marginalized. Standards carry heavy momentum
What is Price Skimming then ? Lets have a look at its advantagesPrice skimming is a pricing strategy which companies adopt when they launch a new product,in this strategy while launching a product company sets high price for a product initially andthen reduce the price as time passes by so as to recover cost of a product quickly.ExampleAn example of price skimming would be mobiles which are have some added features are soldat higher prices and then prices began to decline as time passes by, another example of priceskimming would be 3D televisions which are right now being sold. Given below are some of theadvantages and disadvantages of price skimming –Advantages of Price Skimming* High profit margin. The entire point of price skimming is to generate an outsized profit margin.* Cost recovery. If a company competes in a market where the product life span is short, price skimmingmaybe the only viable method available for ensuring that it recovers the cost of developing products.* Dealer profits. If the price of a product is high, then the percentage earned by distributors will also be high,which makes them happy to carry the product.* Quality image. A company can use this strategy to build a high-quality image for its products, but it mustdeliver a high-quality product to support the image created by the price.
Disadvantages faced by Price Skimming ?Disadvantages of Price SkimmingThe following are disadvantages of using the price skimming method:* Competition. There will be a continual stream of competitors challenging the sellers extremeprice point with lower-priced offerings.* Sales volume. A company that uses price skimming is limiting its sales, which means that itcannot lower costs by building sales volume.* Consumer acceptance. If the price point remains very high for too long, it may defer or entirelyprevent acceptance of the product by the general market.* Annoyed customers. Early adopters of the product may be highly annoyed when the companylater drops its price for the product, thereby generating bad publicity and a very low level of *customer loyalty.* Cost inefficiency. The very high profit margins engendered by this strategy may cause acompany to avoid making the cost cuts required to keep it competitive when it eventuallylowers its prices.
Lets all have a quick glance at the summary ?
Q ) As the president of new high definition television company,you must decide between a penetration or skimming pricing policy.explain the factors you would consider in making your choiceFor the above mentioned question , I would go with price skimming method asit’s the best choice for a new product entry . Best choice for an innovative kind ofproduct .We will be able to “ skim the cream off the market “ by Initial high priceLater on, the mass market can be tapped by lowering the price. If there are doubtsabout the shape of the demand curve for a given product and the initial price isfound to be too high, price may be slashed. However, it is very difficult to start lowand then raise the price. Raising a low price may annoy potential customers.Factors for choosing Skimming areThe price will be at the top of the demand curve .Price elasticity is low.Cross-elasticity is also low.Absence of close substitutes in initial stage helps reap profits .
Thank You and God Bless