Skimming and penetration pricing strategies are used by the company when it is launching a new product into the market, but there are many differences between these two pricing strategies. In price skimming strategy, the company focuses on setting higher price for the product when introducing it to the market, and then decreasing it gradually. In this strategy, price is set high for skimming maximum revenues. The revenues are, however, skimmed layer by layer from the market segments that are willing to pay higher price; the organization in this way profitable sales though they are fewer in number (Kotler, Burton, Deans, Brown & Armstrong, 2015). In price skimming strategy, the price is not based on the competition; instead it is based on the financial value that the product represents to the customer, and it comes mostly from within the organization. Additionally, this strategy can be used in emerging markets, where some customers always demand advanced and new product. However, this strategy is also effective in the mature market, in which customers are already familiar with the product and product attributes, and is willing to pay as they consider it their investment. It also works successfully in the declining markets where loyal customers are willing to pay for old but superior product having diminishing demand.
Skimming pricing strategy is used in the introduction stage where the growth of sales is low, and the company is earning little profit (Havaldar, 2005). The company uses high price in the introductory phase for making high profits, and to cover initial cost. An example in this regard is introduction of iPhone by Apple Incorporation. Apple set high price in the beginning, and then after a period of six months, it reduced the price. However, the company would introduce new features in the product in order to attract new customer, and afterwards it again dropped the price. It focused on skimming maximum amount of revenue in several market segments for attracting new customers, and for making the image of company sustainable.
In price penetration strategy, initially low price of the product is set in order to rapidly reach the wider market. This strategy, however, perform functions on the basis of expectation and assumption that customer will consider switching to a new brand due to low price. The reason behind setting low price is to attract majority of buyers and a huge market share. An example in this regard is use of this strategy by IKEA. The company used price penetration strategy in order to increase its success and growth in the Chinese market. It has used low pricing strategy on all products in order to attract more and more customers from Chinese market, and this strategy in fact enabled the company to attract many customers (Kaynak, 2013).
Moreover, price penetration strategy is used during the growth phase of lifecycle of the product. During the growth phase of the cycle, the sales are expanding on continuous basis, and customers demand new products, and there is product, which is already used by other people. The penetration strategy works when average customers prefer to purchase a product, and when the number of sales in greater. The company is attracting customers towards a new but tested product at reduced price, as it wants to develop relations with customers who are willing to buy a new product at lower price.
References
Havaldar, K.K. (2005). Industrial Marketing: Text and Cases. Tata McGraw-Hill Education, New Delhi
Kaynak, E. (2013). International Marketing: Sociopolitical and Behavioral Aspects. Routledge, New York
Kotler, P., Burton, S., Deans, K., Brown, L., & Armstrong, G. (2015). Marketing. Pearson Higher Education, Australia
