Price Skimming And Penetration Pricing

1973 Words 8 Pages
Price is an important factor in marketing and is often shaped by factors such as the product type, market conditions and the demand and supply of goods or services available. As such, businesses often employ “price strategy in marketing” for it not only enables a company to ascertain an “optimum price for a product” but also plays an important role in determining whether a company gains profits or faces losses. There are variety of pricing strategies and each influence customer decisions differently as there is no single pricing practice that would attract all customers. Pricing strategies can be classified as new product pricing, psychological pricing, discount pricing. This essay will discuss the effects and limitations of these pricing practices. …show more content…
Price skimming is a pricing strategy in which the company sets a relatively high price for a product at first, and lowers the price over time. (Gitman, Lawrence J., and Carl D. McDaniel 2010, 393) The objective of price skimming is to maximize short-term profit. One of the advantages of using this strategy is so that the company is able to gauge how much a customer is willing to pay for that certain product. If sales of that product are good even though the product is set at a relatively high price, it means that the pricing can be kept constant. If the sales are not good, the company can then make the decision to decrease the price slowly. Another advantage is that if a product is priced highly and the price is rapidly decreased, the customers might think that they are getting a bargain and this reacts upon them psychologically, making them think that they should buy it. And also, another advantage is that the high price will make the customers perceive it as a prestige and high quality …show more content…
The objective of penetration pricing is to increase market share or sales volume. One of the advantages of penetration pricing is that it is able to encourage brand switching. When a new product is priced low, it is able to lure customers away from the other competitors. Another advantage is that it discourages the entry of competitors. Since the product is priced at a relatively low price, if other competitors were to enter the market and price their product at a lower price or at the same price, they would have to sell more products to break even. However, there are also limitations to penetration pricing. One of the limitations is that if a product is priced lowly, it will develop a long-term price expectations among consumers. Customers would expect the prices to remain the same and hence it would be difficult to increase the prices in the future. (Larry Dwyer, Peter Forsyth

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