If your business is planning to launch a new product, penetration pricing and price skimming are two marketing strategies you should consider. Each strategy has benefits and disadvantages, so research your target market carefully beforehand to determine what approach will work best for your company.
Penetration pricing occurs when a company launches a low-priced product with the goal of securing market share. For example, a sponge manufacturer might use a penetration pricing strategy to lure customers from current competitors and to discourage new competitors from entering the industry. If the sponge’s price is low enough, consumers will flock to the new product. Competitors who can’t produce and promote sponges for such a small profit will avoid the market, freeing the sponge company to maximize brand recognition and goodwill.
Penetration pricing requires extensive planning, according to the book “The Future of Business: The Essentials,” by Lawrence J. Gitman and Carl McDaniel. To properly execute a penetration-pricing strategy, the sponge manufacturer first must gear up for mass production and then launch a sizable advertising campaign to publicize its new low-priced sponge. Both steps are expensive, so penetration-pricing strategies might not work well for small businesses. Also, if your company’s forecasts for consumer demand are off, you could end up with a large stockpile of unwanted products.
A price skimming strategy focuses on maximizing profits by charging a high price for early adopters of a new product, then gradually lowering the price to attract thriftier consumers. For example, a cell phone company might launch a new product with an initial high price, capitalizing on some people’s willingness to pay a premium for cutting-edge technology. When sales to that group slow or competitors emerge, the company progressively lowers its price, skimming each layer of the market until the low price wins over even frugal buyers.
Price skimming offers four major advantages, according to “The Future of Business: The Essentials.” It can offer insight into what consumers are willing to pay. It can create an aura of prestige around your product. If the initial price is too high, you can lower it easily. Finally, late adopters might be pleased to get your prestigious product at a bargain price, which creates goodwill for your company. A major disadvantage, however, is that large profits attract competitors, so this price strategy only works well for businesses that have a significant competitive advantage, such as proprietary technology.