skimming pricing strategy
Name one product for which the skimming pricing strategy is appropriate and one product for which a penetration pricing strategy would be appropriate. In each instance, explain how the strategy would work for the product you pick. Do not pick products already discussed in the textbook. Also, give two examples of discount pricing that you have encountered as a consumer. Finally, identify which of the three pricing strategies (skimming, penetration, or discount) is the best to use and why?
Reply 1. Smart phone is a great product for the skimming pricing strategy. This strategy focuses on maximizing profit by increase prices for new products. To later on lower prices to attract more customers. Skimming give companies a better insight into what consumers will pay.
Jordan sneakers are a great product for penetration pricing strategy. Take Amazon for example, when new releases are being released Amazon would lower their prices to lure customers in; in hope of discouraging new competitors from entering the industry. If Amazon prices are low enough, consumers will gravitate to the new product. Competitors who can’t promote or produce the new releases for such a small profit will avoid this market, allowing Amazon to maximize their prices and brand.
Two examples of discount pricing
First, I would say cell phones. When these new phones are being released the prices are ridiculous. Note 3 for example, it starting price was $699.00 for about the first 30 days. After that time it went down to two hundred dollars to $499.00.
Another experience I’ve encounter is with the cable companies. They offer all these low prices to make customer feel like they’re getting the best deal of a lifetime only to found out that the prices go up after about four to six months only to increase the prices later.
Reply 2. Video games are an example of a skimming price industry. Countless new games are being released all the time a high prices. After a certain amount of time, usually when sales start to drop off, the gaming company will lower the price to attract more customers.
I would say that Asian built cars such as Toyota started out with penetrating prices. Back in the early 80s, Toyota offered inexpensive cars to American buyers compared to their American built counterparts. Even though they were cheaper, they were still well built and lasted just as long as American built cars. Now in the present, Toyota cars are just as expensive as American built cars but since they successfully penetrated the American market, they can price their cars higher now.
Big box stores such as Wal-Mart continuously employ discount pricing. Usually, there are products sold in which two are bought and the third is free. This attracts customers to buy two when they only needed one. Another form of discounting is seasonal clothing that is out of season. Retailers are pressured into getting rid of seasonal wear once that season has passed and thus are forced to discount prices. A heavy winter coat may be $200 in the middle of winter, but if that same coat is still on the rack in the middle of July, it may be $100 now.
I think all three pricing strategies are effective in their own ways. The penetrating prices are great for companies trying to enter a new market. Skimming prices are great for maximizing profits. Discounting is a good tool to use when supply is too high and demand is down.
• Reply 3. A skimming pricing strategy introduces a unique product or service into the market at a very high price. This is done deliberately because the competitors for the same product or service may be limited in that market. In many cases, the high price is set temporarily until demand is satisfied at that point. Then, the price is gradually lowered to attract the next customer segment that is willing to pay the adjusted price. This is repeated until the demand is saturated in all customer segments.
Businesses use this strategy to:
o help recoup costs of development
o stand out from their competitors as a provider of a higher quality or more advanced goods/services
o attract high-end customers who can afford and are willing to pay the higher prices
An example of price skimming could occur if a car manufacturer developed and marketed a hybrid electric vehicle (HEV) which could provide electricity to power the grid. In addition to its many benefits, the lucky owner could make money by selling excess power from his/her HEV to the utility.
It costs the manufacturer $40,000 to build the HEV; however, their market analysis shows that owners could recover their purchase price of the HEV within 3.5 years. Also, research indicates that the manufacturer’s competitors have not developed a similar model. The manufacturer’s survey indicates there is definitely a customer segment that can afford, and are willing to buy this HEV baby. So, armed with their data, they price the vehicle at $102,900. They also decide to keep the vehicle at that price until their product development costs ($300,000) are recouped with a little profit for good measure. Then, later the manufacturer lowers the price to, let’s say $29,000. This price skimming technique takes care of their development costs and throws a monkey wrench in their competitors’ plan to enter into the market.
A penetration pricing strategy is quite the reverse of the skimming pricing strategy. The competition field is wide open and crowded. So, a business entering a developed market with a new product will temporarily set a price for their merchandise lower than that of its competitors. This tactic will draw some customers away from established competitors. Once its product attains market acceptance, the same business will raise its price to that of, or near its competitors’ prices.
I have been on the odd end of this pricing strategy often. One of many times includes when my friend “Kathy Klean” told me about a new cleaner named Fabuloso. She raved about how it made her bathrooms and kitchens sparkling clean *and* it was so much cheaper than other brands! Well, I a bit reserved about buying it because the name ‘sounded’ cheap. Plus, it came in all of these weird non-standard colors like purple, blue and green...now orange. But, I trusted my friend’s judgment and gave it a try. Well, she was right. Fabuloso was awesome. And, it was much cheaper than Lysol, Mr. Clean, PineSol, and other leading brands. I still use some of these brands as needed.
Initially, I paid $1.49 for my 56 oz bottle of Fabuloso which was a super deal to me. I told everyone that I knew who was a “klean freak” about my fav Fabuloso. As expected, it caught on (penetrated the market). Now, the conservative price for a 56 oz bottle is $2.79 at Walmart. Kroger sells it for $3.99! I still buy Fabuloso because it is a great deal even at the new higher price.
According to Cindy Forman of Webster University, discount pricing strategies are deployed when “quantity discounts are offered to customers who purchase in large quantities, cumulative quantity discounts that increase as the cumulative quantity purchased increases, or seasonal discounts based on the time that the purchase is made and designed to reduce seasonal variation in sales.”
Quantity discounts
I suppose shopping at Club Warehouse stores like COSTCO and Sam’s Wholesale is a way I have been able to take advantage of discount pricing based on quantity. But, I haven’t actually crunched the numbers to really see if I am really getting a discount. The reason why I shop at COSTCO is because they provide the larger quantities of items that are needed. So, over the long haul, buying bulk cuts down on the number of times I have to do grocery shopping.
Cumulative quantity discounts
I have encountered this by doing rate analyses on facility accounts. For electricity consumed by a non-residential facility, a customer is charged a rate of $.08427 per kwh for first 15,000 kwh. For each kwh over 15,000 kwh, the same customer is charged $.03617 per kwh. So, in other words, the customer pays more for the first 15,000 kwh and less for electricity consumed above 15,000 kwh.
I think all 3 strategies are useful tools on the roadmap of a business because as it seeks to be recognized in its market, a business can use the penetration pricing strategy (start-up or new product). Next, once it has built its customer base, coffered profits, completed a market analyses and has an innovative product/service, the same business can shift to a price skimming strategy. Then, the discount pricing strategy can be used to move product in order to make room for the new.
For me, in starting my business, I think what would work best is the penetration pricing strategy. I don’t think that I would start out super low in pricing because in my industry, that would raise red flags to potential clients. So, I would most likely do a moderate price penetration. My fees would be below my competitors’ fees, but reasonable. This strategy would help my business to gain recognition in its market and pick-off customers from other consultant firms that are looking for the same or better level of service but at a more efficient costing. With this, I can build a good clientele base that is confident in the quality of services that my company will provide, and at the same time believe they are affordable. The tricky slope of this strategy is how to gradually increase pricing in a measured way that will retain customers and my profitability.
