Pricing strategies: Price skimming; Price penetration | UGC NET Commerce Preparation Course PDF Download

Price Skimming

Price skimming involves setting a high initial price for a new and innovative product, which is then lowered as competition increases. This strategy is commonly used by innovators like Sony and Philips when they launch cutting-edge technologies.

For price skimming to be effective, certain conditions must be met:

• The high initial price can only be justified for unique products where direct substitutes are scarce. Customers are willing to pay more for the novelty and distinctiveness of such products, such as Rolex watches or Rolls Royce cars.
• If a product can be easily replicated, price skimming will not yield long-term profits.
• There must be a segment of customers in the market who highly value the uniqueness of the product and are willing to pay a premium price.

Penetration Pricing

Penetration pricing involves setting a low initial price to quickly gain a large market share. By offering products at a lower price point, a company can attract a significant portion of customers, leaving minimal room for competitors.

Penetration pricing is most effective when the following conditions are met:

• The market is price-sensitive, and customers are looking for affordable options.
• The company aims to establish a strong foothold in the market rapidly and deter competitors from entering.

Penetration Pricing Strategy

• High Price Elasticity of Demand: This occurs when customers are very responsive to price changes and have easy alternatives available.
• Capacity for Production Expansion: Firms can readily increase their production capacity as demand rises.
• Price Sensitivity of Customers: Customers are highly price sensitive, meaning they can quickly switch to a different brand if offered at a lower price.
• Intense Competition: Companies face significant competition when introducing a new product, necessitating strategic pricing.

Application of Penetration Pricing by Reliance Company

The Reliance Company adopted a penetration pricing strategy during the launch of its mobile phones. By setting the initial price remarkably low, the company managed to secure a substantial market share in the mobile phone industry.