Profit margins are low when penetration pricing is used. Overcharging customers by skimming the top of the price leads to fewer sales. Penetration pricing, because of its cheap prices, can result in high volumes of sales. Skimming is a pricing approach used when there is little variation in demand over time. Penetration pricing is used as a technique when the demand for the product is flexible. Skimming pricing is used in product launches with the intention of increasing market share. 'Penetration pricing' is a strategy used to enter a market swiftly and easily. Skimming, as a pricing strategy, is the process of setting a high price for a product by adding substantial markups to its initial sale price. The term 'penetration pricing' describes a pricing strategy in which a new product is initially supplied to the market at a discounted price. The following table highlights how the penetration pricing strategy is different from the skimming pricing strategy − Characteristics The high prices are a contributing factor to the falling demand.ĭemands for products made with care and attention to detail.ĭifferences: Penetration and Skimming Pricing Strategy If other companies begin offering the same products at lower prices, the company might suffer losses. Reducing pricing at a later time will affect the company's bottom line and reputation. This environment is ideal for cutting−edge concepts and premium goods due to the lack of intense competition. Higher−priced items typically indicate a higher−quality product.īeginning businesses have a better chance of turning a healthy profit. The following are some advantages of using a skimming pricing strategy − The substantial asking price is justified by the substantial sums invested in advertising the products. If the price of production is high, to begin with. In this case, everyone benefits from the high prices since they cover the high costs of production. This is true at all stages of the process, but especially at the start.

When supply and demand for the products are both unknown. The process will be repeated until the product is successfully positioned in the market. The following are some examples of situations in which companies use the skimming pricing strategy −ĭemand inelasticity is seen at the beginning of a product's marketing cycle. This tactic is generally used for products with very low or nonexistent levels of market competition. Often, the high price is set before new rivals have a significant market share. In this pricing approach, the high cost of a brand−new product is justified in large part by the substantial markups that must be paid to get it to market. The initial stages of operation often result in lower profits. People may assume that if the price is lower, the quality of the goods is also lower. It has the potential to hasten the onset of pricing wars. On the other side, some of the drawbacks are as follows − The exponential growth of both the company's client base and its market share.Ĭertain brands may appeal more to budget−conscious consumers. More rapid growth in demand is a direct result of the cheaper pricing. The following are some of the benefits of using penetration pricing − When a company wants to slow the influx of brands selling similar products into their sector of the market. When a business needs to quickly increase sales, offering a discounted price might entice customers to make a purchase they hadn't planned on making. The price drop encourages consumers to buy brand−new goods. When a popular company debuts a new product, competitors often follow suit with copies. When these conditions are met, the penetration pricing approach is most effectively implemented − Reduced earnings in the short run are a natural consequence of using a penetration pricing strategy, but the strategy's long−term payoff of better profits and a wider customer base more than makes up for the initial hit. If there is a rise in demand, the price might go up. Using this pricing approach, a brand−new product is introduced to the market at a price that is much lower than its rivals to promote better market penetration. Let's look at the differences between the two by comparing them. Important pricing strategies include market penetration and 'skimming' current clients. Therefore, businesses should carefully evaluate many factors while setting prices. One of the most crucial elements of the marketing mix is the price at which a product is sold.ĭespite the high quality of the supplied product or service, sales may be affected by the chosen pricing strategy. A customer's decision to buy is informed by various criteria, including the product's price, quality, availability of other brands, and consumer interest in those products.

Definition of penetration pricing