Difference Between Penetration Pricing and Skimming Pricing Strategies

Edited by Diffzy | Updated on: November 21, 2022

       

Difference Between Penetration Pricing and Skimming Pricing Strategies Difference Between Penetration Pricing and Skimming Pricing Strategies

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Introduction

Choosing the best pricing approach when a firm introduces a new product might be challenging. The decision between price skimming and penetration pricing depends on goals for the target market or the product's life cycle. Your ability to choose between the two techniques wisely might help you increase sales, enhance the reputation of your business, or lessen competitors. For example, a penetration pricing strategy aims to maximize sales from consumers that are price sensitive by charging a low price upfront. On the other hand, when high fees are first charged to clients, they are progressively lowered to get the most profit from fewer price-sensitive customers.

One of the critical elements of the marketing mix, which is the sole source of revenue for the company, is price. It not only includes a profit margin but also covers the manufacturing cost. Cost, customer demand, and competition are the three main factors that affect a product's cost. Whenever a new product is released onto the market, the company's management must decide between penetration pricing & skimming pricing strategies. Price skimming raises prices to entice clients most interested in the product or service to maximize immediate earnings. To attract customers for new goods or services, penetration pricing employs lower prices. Whether a business seeks to increase market share, overall profit, customer value, or profit margin will determine the best method.

Penetration Pricing Vs. Skimming Pricing Strategies

The meaning definition is the primary distinction between penetration pricing strategy and skimming pricing strategy. Penetration pricing is a product pricing strategy in which businesses initially set a lower price for a given product to attract more customers. Skimming pricing is a product pricing strategy in which businesses initially set a higher price for a given product and gradually lower it over time to draw in more customers. Penetration pricing strategy is the product pricing method when businesses establish a lower price for a particular product to initially draw in more customers. Pricing for market penetration might stop rivals from entering your market at cheaper price points. The onus is on rival suppliers to justify higher charges for comparable products if your upfront price is reasonable and your good or service is of adequate quality. Skimming allows later rivals to undercut your rates and undermine your capacity to bring in money and make profits from early adopters. The ability of opponents to draw in quality-hungry clients who prefer your offering may be countered by a superior product.

Difference Between Penetration Pricing and Skimming Pricing Strategies in Tabular Form

Table: Penetration Pricing Vs. Skimming Pricing Strategies
Parameters Of Comparison
Penetration Pricing Strategy
Skimming Pricing Strategies
Meaning
The initial price set is low in order to attract customers.
Skimming pricing refers to a pricing strategy in which the business sets a high price for the product at the point of launch to make the most money possible.
Object
Market penetration
Skim the cream
Sales
Large amounts are sold since they are inexpensive.
Due to the exorbitant price, small quantities are sold.
Demand
Elastic pricing
Value Inelasticity
Rate of return
Low
High
Process
The market has been entered.
The marketplace is scanned.
Focus
To enter the market to draw clients and boost revenue.
To entice clients and boost revenue by scanning the market
Products
Because the items are inexpensive, they are sold in enormous quantities.
Because the items are expensive, they are only offered in tiny amounts.

What Is Penetration Pricing Strategy?

Penetration Pricing suggests a pricing strategy where a new product is provided at a low price by adding a small markup to its cost of manufacture to enter the market as quickly as feasible. It tries to maximize the product's market share, and once it is attained, or as demand increases, the company can raise its price. Although penetration pricing reduces revenues in the near term, it boosts earnings over time since it broadens the market.

Purpose Of Penetration Pricing Serve

By presenting new items at cheap costs to draw customers away from rivals, penetration pricing attempts to upend the market—this aids in drawing in customers so you can fast expand your clientele.

  • With penetration pricing, we want to:
  • Get a piece of the market
  • Attract clients from rival businesses
  • Create demand for the good
  • Long-term brand loyalty creation

The penetration pricing model performs best when a product or service, such as a subscription, is best suited for a mass market. When developing your price and product strategy, give building brand loyalty great attention. If not, users would switch to any supplier offering the cheapest choice.

Penetration Pricing Benefits Strategy

If the market is suitable for this kind of pricing approach, penetration pricing has a number of benefits for brands.

  1. Increasing Customer Interest: Some companies can benefit from penetration pricing since consumers will be drawn to the cheaper alternative, which will immediately increase sales and word-of-mouth activity. Additionally, it can drive customers away from rival businesses.
  2. Less Competition: Additionally, penetration pricing might be advantageous in some circumstances since it can deter rivals from entering the market if they can't compete at that price point. At least until prices rise, a good approach will have made it much more difficult for the competitors to advance.
  3. Enhanced Brand Loyalty: This tactic enhances brand loyalty before a product introduction. When the price increases, a product that delivers high value and quality will maintain the clients attracted by the low price.

Problems with Penetration Pricing  Strategy

On the other hand, brands shouldn't always use penetration pricing as their primary marketing tactic. It also has several drawbacks of its own.

  1. Customer Service Issues: An excellent illustration of what may go wrong is when cable companies use penetration pricing. People may initially enter the store at a low price, but later price increases may cause them to leave again. Predatory pricing is another name for this. Genuine product value and positive customer experiences are required to prevent this. Again, this is not a joint statement used concerning cable companies.
  2. Risk of Price WarsYou lower your prices, your rivals lower their prices, you reduce your prices, they lower their costs, and now a price war has broken out. Because penetration pricing encourages competitors to undercut you on price, it might raise the possibility of a price war.
  3. Reduced Brand Recognition; One drawback of penetration pricing is the potential to harm brand reputation, which can be challenging to build. Brands seen as expensive or luxurious may benefit more from concentrating on other tactics.

What Is Skimming Pricing Strategy?

Skimming Pricing is the practice of charging a high markup for a new product, resulting in a high price, to exclude the top customers from the market. Setting a high price for the new product before other rivals enter the market includes doing so. When a new product has a high degree of customer acceptability and little to no market rivalry, it is utilized in this manner.

The following justifies the company's use of market skimming pricing:

  • Until the product achieves a favorable position in the market, its demand is inelastic in the early stages.
  • Since the product's initial demand is unknown, a high price helps offset the manufacturing expense.
  • A significant amount of money is initially needed to produce the product, which raises the cost of manufacturing. Additionally, a considerable sum is spent on advertising efforts, which also increases the price. However, high product prices will readily enable manufacturing and marketing costs to be recovered.

Benefits Of  Strategy Skimming Pricing Strategy

  1. Increased Return on Investment: In high-tech sectors, charging the highest initial price at introducing an innovative product might help your business recover research and development expenditures and marketing expenses.
  2. It Aids in Developing and Keeping The Brand Image: For early adopters who can't live without the newest electronic gadgets, price skimming may also provide the impression that a product is a high-quality "must-have."
  3. The Market is Segmented: As was previously said, price skimming is a helpful strategy for segmenting your consumer base, potentially enabling you to maximize revenues as you lower the price from specific customer segments.
  4. Early adopters assist with product testing: Early adopter clients serve as test subjects for new goods, which is one advantage. Before the next update and a broader user base, the status-conscious customers who buy your unique product first can offer helpful feedback and aid in ironing out any problems.

Disadvantages of Price Skimming Strategy

  • Only an inelastic demand curve that doesn't react to price fluctuations is suitable for price skimming.
  • After their initial purchase, price reductions may drive off early adopters.
  • Skimming pricing is only practical if your rivals are developing comparable technology.
  • For your new offering to be successful, the quality must outweigh the greater cost.
  • If the price skimming attempts are unsuccessful, you could have too much inventory.

How And When To Utilize Price Skimming Strategy?

The following scenarios call for utilizing the skimming pricing strategy:

  1. Innovative product: Neither a direct competitor nor a pricing benchmark exists for your new offering. You are establishing a market and competing in it in this instance.
  2. Target market: Regardless of cost, you are going for early adopters or highly discerning consumers who want to buy the most cutting-edge items before their peers.
  3. Unknown demand: To determine how much demand exists for your product, you could price it high to meet production costs, including expensive advertising efforts.
  4. Low price elasticity: Until the corporation establishes a solid position for the product in the market, the product's price has limited leeway to fluctuate or is inelastic. Due to high pricing, skimming enables you to make money despite low sales volume. Sales volume may increase and permit a price reduction after the product has a presence on the market.

Main Difference Between Penetration Pricing and Skimming Pricing Strategies in Points

  • Penetration Pricing may be defined as a pricing strategy used by a company to attract more consumers, in which the product is first supplied at a low price. Skimming pricing, on the other hand, is a pricing strategy in which a high cost is first spent to maximize profit.
  • Penetration pricing tries to increase market share by delivering the product at cheap costs. In contrast, the goal of utilizing a skimming pricing strategy is to maximize profit from clients by providing the product at the most incredible possible price.
  • When demand for a product is relatively elastic, the penetration pricing technique is used. Skimming pricing, on the other hand, is utilized when the product's demand is inelastic.
  • The profit margin for penetration pricing is minimal, but the margin for skimming pricing is quite large.
  • The company sells many goods since the product price is initially low in penetration pricing. However, in the event of skimming pricing, the consumer demands a tiny amount of the goods due to the high cost of the product.
  • When product demand is elastic, penetration pricing is employed. However, skimming pricing is utilized when product demand is inelastic.
  • Due to the cheap costs, penetration pricing generates mass sales. Skimming pricing, however, achieves limited sales due to the high price.
  • Penetration pricing has low-profit margins, whereas skimming pricing has large profit margins.

Conclusion

In a pricing strategy known as penetration pricing, a company first sets a low price to attract a rising number of customers. It works well for items with little to no difference. Skimming pricing, on the other hand, refers to a pricing strategy in which substantial markups are paid for a new product, thus the high price. It is helpful for products with no market rivalry. The penetration pricing strategy and the skimming pricing strategy function exceptionally well when correctly applied by the relevant organization or corporation. These are some of the deft approaches employed by various businesses to extend their operations and increase their revenues. A corporation must test and experiment with such tactics to increase market demand. These trials may fail, but the corporation must always embrace newer and various tactics, as these strategies alter according to market needs.


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"Difference Between Penetration Pricing and Skimming Pricing Strategies." Diffzy.com, 2022. Sun. 27 Nov. 2022. <https://www.diffzy.com/article/difference-between-penetration-pricing-and-skimming-pricing-1114>.



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