Price Skimming And Penetration Pricing

Amazing Essays
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

Related Documents

  • Decent Essays

    For instance, if we use an effective marketing strategy that will increase product awareness in certain areas it'll result in higher product consumption that will also increase market penetration. Advantages and Disadvantages of Market Penetration Strategy/Pricing Market penetration strategy takes advantage of low prices to increase product demand and increase market share. While the demand is increasing, the organization saves money on product creation costs due to the greater volume of production. Though, market penetration strategy doesn't work for all products and businesses, so some companies use different marketing strategies that seem to be more beneficial. Advantages of Market Penetration Strategy Fast Growth - If your business and marketing objective is to enlarge your consumer base, then market penetration is the most effective way to act.…

    • 1241 Words
    • 5 Pages
    Decent Essays
  • Decent Essays

    Obtaining money by ensuring the organization makes a higher profit and therefore pay larger bonuses can be achieved in several ways. Competing unfairly to obtain a greater advantage and therefore gain a bigger market share than competitors is one method that managers use to increase sales and in so doing profits. Other unethical approaches relate to reducing expenses by engaging employees on short term contracts instead of employing them permanently; buying cheap supplies from suppliers who illegally use children to produce their products; or applying pressure to suppliers to provide supplies at a cheaper…

    • 1176 Words
    • 5 Pages
    Decent Essays
  • Decent Essays

    There is a lot of competition and being able to gain more business would put any business owner at an advantage of becoming one of the most successful business owners. In business, the purpose of elasticity is to measure the degree of response from a buyer or seller to change in the price of a certain good or service. This would be important to understand in a case such as a business owner who would want to lower prices or have a sale. The business owner would have to figure own how much of a change in price to make and how much of a response would be given in return to the lower prices for instance and another consideration is how much money could be at stake of losing when changing prices. Most likely, the business owner would want the increase in purchases to outweigh the change in price in a case like this.…

    • 1180 Words
    • 5 Pages
    Decent Essays
  • Decent Essays

    Market Saturation

    • 1070 Words
    • 4 Pages

    A company must be able to price products and services competitively. Although discount programs can be a good way to attract customers, it also might result in price wars with competitors. As a consequence, a company might generate less profit. Companies need to get data on its competition’s product and service prices regularly so that they can compare and compete. Temporary sales and discounts with no clear end date are a good way to generate some quick revenue.…

    • 1070 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    An overly-risky project can potentially cause investors to assign a higher discount rate on the firm, which would lead to a lower stock price. The managers of a firm should attempt to do everything that they can to maximize shareholder wealth; this means selecting projects that the firm’s investors are comfortable with. Furthermore, risk can cause a project’s cost of capital to become higher than anticipated. Creditors would assess the riskiness of the project and demand an interest rate that adequately compensates them for lending funds. A higher-than-anticipated cost of capital could make a profitable-looking investment not so attractive to the firm.…

    • 800 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    Penetration pricing is one way to set the price. This approach is aimed to obtain market share and increase sales quickly by setting a low price for new products. Once the company has obtained a certain amount of profits and market share, they will gradually increase prices for its product. Another popular pricing strategy is skimming pricing. A company such as Apple and Nintendo is likely to use this strategy.…

    • 762 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    However a monopoly must lower price to increase output and sell it. Output will increase and be a lot more substantial than in a monopolistic competitive market. If a substantial amount of money is invested in inventory and it is not moving for some reason, the monopoly would lower prices as well. Fear of competition in a monopoly also works in the consumer’s favor by providing the consumer with improved products and better pricing. In a monopolistic competitive market, industries will produce as much as they can sell.…

    • 1485 Words
    • 6 Pages
    Decent Essays
  • Decent Essays

    Tesco Research

    • 1998 Words
    • 8 Pages

    Another pricing strategy Tesco does is a loss leader. A loss leader is when a certain product is below the cost price and, therefore, it is making a loss on that product. An advantage of Tesco doing this is that it will attract customers to buy these products along with other products that are not making a loss. However, Tesco could be in trouble if the customers keep on buying the loss leader products. Also, Tesco has the finest range store (appendix 2.2) which is similar to price penetration, where they target high-income segments.…

    • 1998 Words
    • 8 Pages
    Decent Essays
  • Decent Essays

    Pricing Strategy Analysis

    • 1777 Words
    • 7 Pages

    Problems with this approach: Price skimming strategy cannot last for long Competitors rapidly launch rival products, putting pressure on price To encourage broad distribution (place), it may be necessary to give retailers higher markup, reducing the improved margins Skimming may slow down demand for the product, giving competitors more time to develop lower cost substitute products brought to market when volume demand is strongest Loss leaders A loss leader is a product priced below cost in order to attract consumers. It encourages customers to make further purchases of profitable goods while they are in the shop. Using loss leaders can help drive customer loyalty by undercutting competitors on price, new customers can be attracted, and existing customers may become more loyal.…

    • 1777 Words
    • 7 Pages
    Decent Essays
  • Decent Essays

    Mm4 Book Review

    • 817 Words
    • 4 Pages

    107, Iacobucci), prices have a great impact on whether the customer will buy a product. The price controls the supply and demand of a product. Prices can range from low, medium, and high. Lower prices can be used as a means to breakeven and keep the company afloat, or it could even be an attraction to lead customers to buy other products that are higher in price. Medium prices can range from low to high prices based on the circumstances of the company.…

    • 817 Words
    • 4 Pages
    Decent Essays