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Difference Between Penetration and Skimming Pricing Strategy

Whenever a consumer is making a purchase, the price, quality, availability of competitive brands and the demand are some of the considerations made before a final decision is made. Price is among the major components in the marketing mix. Regardless of how good a product or service is, the pricing strategy used can affect sales. As such, businesses ought to set their pricing in consideration of various factors. Among major pricing strategies include penetration and skimming pricing strategies. Let’s look at the differences between the two. 

What is Penetration Pricing Strategy?

This is a pricing technique where a new product is introduced to the market at a low price to make market penetration easier. The price can then be increased after the demand picks up. While penetration pricing strategy lowers profits in the short run, it results in higher profits in the long run hence increasing the market base. 

Penetration pricing strategy is best carried out when:

  • A brand is introducing a new product in the market that is also provided by other brands. The lower price lures consumers to the new product. 
  • When a brand is looking to increase revenue over a short period. A lower price often makes consumers make purchases, even when they were unplanned. 
  • When a brand wants to restrict new entrants offering similar products in the market. 

Advantages of penetration pricing include:

  • The lower prices help the demand grow faster
  • Brand awareness grows faster 
  • Customer base and market share grows faster
  • Brands get to attract the price-sensitive customers

On the other hand, disadvantages include:

  • It can easily cause price wars
  • Lowering the price may give the perception of a lower quality product 
  • Decreased profits in the introductory phase

What is Skimming Pricing Strategy?

This is a pricing strategy where high markups are charged for a new product hence the high price. The high price is often fixed before other entrants get a share in the market. This technique is mostly used for products that have little or no competition in the market. 

Among instances where brands adopt the skimming pricing strategy include:

  • Inelastic product demand is seen in the early product marketing stages. This is carried out until the product gets a good position in the market. 
  • Where the demand for the product is unknown. This especially occurs in the initial phase. The high prices help cover the costs of production which is beneficial especially if the production costs are high. 
  • Where the initial cost of production is high. Since huge amounts are used in promoting the products, the extra cost is covered by the high price. 

Advantages of skimming pricing strategy include:

  • Higher priced products are often associated with higher quality
  • Great profits are made in the introductory phase
  • Suits innovative products as well as high-quality goods since there is low competition

On the other hand, disadvantages include:

  • If the prices are lowered later, the profit margins and brand image is affected
  • The company could suffer losses if competitors offer similar products at lower prices
  • The demand declines due to the high prices
  • Needs products that are focused and invested in the quality

Similarities between Penetration and Skimming pricing strategy

  • Both aim at the successful introduction of a new product in the market

Differences between Penetration and Skimming pricing strategy

Definition

Penetration pricing refers to a pricing technique where a new product is introduced to the market at a low price to make market penetration easier. On the other hand, skimming pricing refers to a pricing strategy where high markups are charged for a new product hence the high price.

Objective

While penetration pricing aims to penetrate the market easily, skimming pricing aims to skim the market via the introduction of new products. 

Demand

Penetration pricing is used when the product demand is elastic. However, skimming pricing is used when the product demand is inelastic.

Sales quantity

Penetration pricing achieves bulk sales due to the low prices. On the other hand, skimming pricing achieves small sales due to the high pricing. 

Profit margins

Penetration pricing achieves low-profit margins while skimming pricing achieves high-profit margins. 

Penetration vs. Skimming pricing strategy

Summary of Penetration vs. Skimming Pricing Strategy

Penetration pricing refers to a pricing technique where a new product is introduced to the market at a low price to make market penetration easier. It is effective for products with little or no differentiation. On the other hand, skimming pricing refers to a pricing strategy where high markups are charged for a new product hence the high price. It is effective for products with no competition in the market. 


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References :


[0]Liu J & Rekettye G. Pricing: The New Frontier. Transnational Press London, 2018.https://books.google.co.ke/books?id=DweCDwAAQBAJ&printsec=frontcover&dq=Difference+between+penetration+and+skimming+pricing+strategy&hl=en&sa=X&ved=2ahUKEwiQuPD22envAhXYWRUIHRwBC1wQ6AEwBHoECAIQAg#v=onepage&q=Difference%20between%20penetration%20and%20skimming%20pricing%20strategy&f=false

[1]Krishnamurthi L & Vohra R. Principles of Pricing: An Analytical Approach. Cambridge University Press, 2012. https://books.google.co.ke/books?id=kq6rec7KLkoC&printsec=frontcover&dq=Difference+between+penetration+and+skimming+pricing+strategy&hl=en&sa=X&ved=2ahUKEwiQuPD22envAhXYWRUIHRwBC1wQ6AEwCXoECAQQAg#v=onepage&q&f=false

[2]Mark Stiving. Impact Pricing: Your Blueprint for Driving Profits. Entrepreneur Press, 2011. https://books.google.co.ke/books?id=iM4kusxDa8YC&printsec=frontcover&dq=Difference+between+penetration+and+skimming+pricing+strategy&hl=en&sa=X&ved=2ahUKEwiQuPD22envAhXYWRUIHRwBC1wQ6AEwAnoECAEQAg#v=onepage&q=Difference%20between%20penetration%20and%20skimming%20pricing%20strategy&f=false

[3]Image credit: https://commons.wikimedia.org/wiki/File:Pricing-strategies.jpg

[4]Image credit: https://commons.wikimedia.org/wiki/File:Price_skimming_small.png

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