Introduction Pricing is an important strategic issue because it is related to product positioning. There are many ways to price a product, eg. price skimming, penetration pricing, etc. Price skimming is a pricing strategy in which a marketer sets a relatively high price for a product or service at first, and then lowers the price over time where a new, innovative, or much-improved product is launched onto a market. The objective with skimming is to “skim” off customers who are willing to pay more to have the product sooner; prices are lowered later when demand from the “early adopters” falls.
The success of a price-skimming strategy is largely dependent on the inelasticity of demand for the product either by the market as a whole, or by certain market segments. The main objective of employing this strategy is to benefit from high short-term profits and from effective market segmentation. Penetration pricing involves the setting of lower, rather than higher prices in order to achieve a large, if not dominant market share. This strategy is most often used businesses wishing to enter a new market or build on a relatively small market share.
This will only be possible where demand for the product is believed to be highly elastic, penetration pricing strategy may also promote complimentary and captive products. The main product may be priced with a low mark-up to attract sales (it may even be a lossleader). Customers are then sold accessories (which often only fit the manufacturer’s main product) which are sold at higher mark-ups. A successful penetration pricing strategy may lead to large sales volumes/market shares and therefore lower costs per unit.
The effects of economies of both scale and experience lead to lower production costs, which justify the use of penetration pricing strategies to gain market share. Penetration strategies are often used by businesses that need to use up spare resources (e. g. factory capacity). Burger King Burger King (BK), the second largest fast food hamburger restaurant chain in the world, with over 11,000 company-operated and franchised restaurants in over 70 different countries. The company uses market penetration strategy which amounts to increasing sales of existing products while at the same time trying to maintain current margins of profitability.
According to the straits times, geographical placing of the restaurants plays a major factor for market demand. It also mentioned that “even the best products have only partial market penetration, and that is why, in the real world, BK does not have four outlets sitting squat opposite each other. ” (Ho, July 16, 2002) From my view, before a penetration strategy is in place, supplier must be certain that it has the production and distribution capabilities to meet the anticipated increase in demand. Demand is price-sensitive and either new buyer will be attracted, or existing buyers will buy more of the product as a result of a low price.
In order to win back the traditional female consumers, COACH begins large-scale strategic adjustments, and some of the positioning of advertising pointing to younger consumers. COACH first readjusted the company’s management, and part of the manufacturing shift to Asia, Central America and Europe. At the same time, COACH expanded product line, new products, including watches, footwear, jewelry, hats, scarves and gloves.
From my view, the most obvious potential disadvantage of implementing a penetration pricing strategy is the likelihood of competing competitors following suit by reducing their prices also, thus nullifying any advantage of the reduced price. A second potential disadvantage is the impact of the reduced price on the image of the offering, particularly where buyers associate price with quality. A Brand Ambassador can be employed to embody the corporate image of COACH in appearance, demeanour, and values. With celebrity endorsement, the marketing strategy can be switch between pricing skimming and penetration price to increase the profits.
Apple Apple Inc. uses the Apple brand to compete across several highly competitive markets, including the personal computer industry with its Macintosh line of computers and related software, the consumer electronics industry with products such as the iPod, digital music distribution through its iTunes Music Store, the smart phone market with the Apple iPhone, and more recently magazine, book, games and applications publishing via the AppsStore for iPhone and the iPad tablet computing device. For marketers, the company is also establishing a very strong presence to rival Google in the advertising market, via its Apps business and iAd network.
For several years Apple’s product strategy involved creating innovative products and services aligned with a “digital hub” strategy, whereby Apple Macintosh computer products function as the digital hub for digital devices, including the Apple iPod, personal digital assistants, cellular phones, digital video and still cameras, and other electronic devices. More recently, the full impact of a very well thought out brand strategy has come into focus – and one in which customer experience is central. Apple has adopted the price skimming strategy where high prices can be enjoyed in the short term where demand is relatively inelastic.
In short term, the supplier benefits from ‘monopoly profits’, but as profitability increase, competing suppliers are likely to be attracted to the market and the price will fall as competition increases. There are several advantages of using price skimming, one would be when a highly innovative product is launched, research and development costs are likely to be high as the costs of introducing the product to the market via advertising etc. The practice of price skimming allows some return on the set-up costs. Another would be charging high prices initially; a company can build a highquality image for its product.
Charging initial high prices allows firming the luxury of reducing them when the threat of competition arrives. By contrast, a lower initial price would be difficult to increase without risking the loss of sales volume. I find that pricing skimming for Apple products is an effective strategy as the company can divide the market into a number of segments and reduce the price at different stages in each, acquiring maximum profit from each segment. An example would be the recent launch of iPhone 4s. Due to the current society where technology is very advanced, consumers will not stop investing at getting the latest technology.
Conclusion I have learnt that pricing strategy for a new product should be developed so that the desired impact on the market is achieved while the emergence of competition is discouraged. There are two basic strategies that are commonly used in pricing a new product; pricing skimming and penetration price. Price skimming is the strategy of establishing a high initial price for a product with a view to “skim” maximum revenue layer by layer from the market. Penetration pricing is a strategy employed by businesses introducing new goods or services into the marketplace.