Penetration Pricing Vs. Price Skimming
Penetration pricing and price skimming are two pricing strategies that are mostly used in the introduction stage of the product life cycle. Penetration pricing is a pricing strategy in which at the initial stage the price of the product is set low. On the other hand, in price skimming initially products price is set high.
In this article, we will understand price skimming and penetration pricing and the differences between them. So let’s get started:
What is Penetration Pricing?
Penetration Pricing means starting a new product at a low price to attract lots of customers quickly. Companies use this strategy to get into a market fast and gain lots of buyers.
The low price encourages people to choose their product over others. Later, when more people buy, they might increase the price. It’s like a special deal at the beginning to get everyone interested.
What is Price Skimming?
Price Skimming is when a company starts a new product with a high price to get the most from customers willing to pay a lot for something new or special.
They aim to make big profits early on, especially when there’s not much competition. Later, they might lower the price to attract more buyers. It’s like offering something new at a fancy price for those who want it first.
Difference Between Penetration Pricing and Price Skimming
Now, let’s differentiate between penetration pricing and price skimming on the basis of differences:
Definition
Penetration Pricing: This strategy involves setting an initial low price for a new product or service. Its primary aim is to swiftly capture a larger market share by attracting customers with an affordable price point.
Price Skimming: In contrast, price skimming starts with a higher initial price for a new product or service. This approach capitalizes on early adopters’ willingness to pay a premium for innovative or exclusive offerings. Over time, the price gradually decreases to appeal to a broader market.
Read More: What is Product Life Cycle Pricing?
Objective
Penetration Pricing: Rapid market entry and broad customer acquisition are the central goals. The strategy emphasizes affordability to quickly establish a customer base.
Price Skimming: The focus is on maximizing profits from customers eager to pay a premium for uniqueness or innovation. It aims to capitalize on this demand before gradually reducing prices to reach a wider audience.
Sales Volume
Penetration Pricing: Lower prices attract a larger customer base, resulting in higher sales volumes. This strategy targets price-sensitive consumers seeking value.
Price Skimming: Due to higher initial prices, sales volumes tend to be lower. The focus is on a specific niche willing to pay more for the unique features or early access to the product.
Read More: What is Product Mix Pricing? Definition
Profit Margins
Penetration Pricing: Initially, profit margins might be lower due to the lower pricing strategy aimed at market penetration.
Price Skimming: Enjoy higher profit margins initially, as early adopters are willing to pay a premium for the product’s exclusivity or novelty.
Suitability to Market Stage
Penetration Pricing: Most effective in competitive markets with established brands. It facilitates swift market entry by offering a competitive price.
Price Skimming: Suited for products with little or no competition, leveraging uniqueness or innovation for higher initial profits.
Penetration Pricing and Price Skimming strategies diverge in their approach, not just in pricing but also in their long-term vision, customer focus, market positioning, and price adjustment strategies.
Read More: What is an Odd Pricing Strategy?
Longevity
Penetration Pricing: This strategy adopts a long-term perspective, aiming to establish a substantial market share by offering lower prices initially. The goal is to gradually increase profits over time.
Price Skimming: In contrast, price skimming is a short-term tactic, maximizing initial profits by setting high prices for early adopters. It’s less concerned with long-term market share but rather emphasizes immediate gains.
Customer Focus
Penetration Pricing: Targets price-sensitive customers by providing products or services at lower initial prices, attracting a broader customer base.
Price Skimming: Focuses on attracting early adopters, individuals willing to pay a premium for innovative or exclusive products, rather than appealing to price-conscious consumers.
Read More: Psychological Pricing Strategy
Market Positioning
Penetration Pricing: Aim at expanding market reach and building brand recognition by offering affordable pricing and accessibility.
Price Skimming: Emphasizes product exclusivity, uniqueness, and premium quality to position the product as high-end or exclusive, often creating a perception of superior value.
Price Adjustment Strategy
Penetration Pricing: Involves gradual price increases over time. As the product gains market share and establishes itself, slight price adjustments occur to ensure profitability.
Price Skimming: Gradually decreases prices to broaden the product’s market appeal or in response to competition. This adjustment aims to attract a wider range of customers.
Examples
Penetration Pricing: WhatsApp’s initial offering of free or low-cost usage, swiftly attracts a massive user base by leveraging affordability.
Price Skimming: Apple’s strategy of launching new iPhones at premium prices, targets early enthusiasts and loyal customers willing to pay a premium for the latest technology and brand prestige.
Read More: Promotional Pricing Strategy
Risk of Competitor Response
Penetration Pricing: This strategy often triggers aggressive responses from competitors who might also slash prices, leading to potential price wars. Competitors might aim to match or undercut these lower prices to retain or gain market share, affecting profit margins.
Price Skimming: When a company uses price skimming, competitors might respond by offering similar products at lower prices, attempting to attract customers away from the higher-priced product. This competitive response can impact the sales of the skimming strategy.
Product Life Cycle Suitability
Penetration Pricing: Ideally suited for products with longer life cycles and broader market appeal. This strategy aims for sustained growth by quickly capturing market share and gradually increasing prices over time.
Price Skimming: Better suited for products with shorter life cycles or unique features that create early demand. Leveraging this initial demand enables the company to maximize profits before competitors enter the market or imitate the product.
Read Next: Geographical Pricing Strategy
Arti Kushmi holds a BBS (Bachelor in Business Studies) degree and shares her business and marketing knowledge through this website. While not writing she will be reading and enjoying the moment.