Price skimming is a pricing strategy which companies adopt when they launch a new product, in this strategy while launching a product company sets high price for a product initially and then reduce the price as time passes by so as to recover cost of a product quickly. There are no real advantages, however, if for example a floor price is imposed on Cigarettes, then less people will be smoking. After tax profit at most companies tends to fall between 10% and 17%, so a 15% savings offer leaves thin margins. Low prices that guarantee customer base growth, means that you can increase the quantity of products ordered from the supplier, which will result in higher profits gained from low prices. For example, when prices are already low, it means that consumers have already built trust towards an existing company, so entering the market and trying to beat the price of the competitor is an ineffective way to act.
Once a low price is quoted, it is difficult to rise it later. There will be a continual stream of competitors challenging the top tier pricing category with lower-priced offerings. Those who were not able to afford the product during its initial offering will be able to buy it after subsequent price adjustments. Evaluation of Penetration Pricing This method is most useful for large companies that have sufficient resources to lower prices substantially and fight off attempts by competitors to undercut them. Increased Promotion — Investing more time and strength in a promotion can dramatically increase market penetration. Buyers always want better and when the opportunity comes, they always shift towards the best. Penetration Pricing is when the price is pegged at a rate that very price-sensitive segments find acceptable.
If a company chooses to follow a premium pricing strategy, it will have to confine its selling efforts to the top tier of the market, which limits its overall sales volume. Under this pricing strategy, the export firm fixes a very high price for its product. Such a prospect may be in a buy cycle stage of researching, only casually thinking about making a purchase, or perhaps in a comparison shopping stage and thinking about buying the competition without a clear winner in mind until the promotional offer with deadline prompts them to take action. The main disadvantage is that promotional pricing tends to produce cash flow but not profit. It allows him to meet development expenses in a short span.
On the other hand, this price strategy has its advantages and disadvantages. High prices imply high quality for quality conscious customers. You can attract more customers if they are draw to your unique business. This can create more trade through word of mouth. Thus subsequent price hike leads to loss of market share gained.
Penetration pricing strategy can go horribly wrong for your business if competitors also decide to further lower down their product prices. It is very common in technological markets mobile phones, gaming consoles such as Sony Playstation and Microsoft X-box, etc. Disadvantages: 1 A private market economy may be quite unstable unemployment, inflation, growth 2 Business may simply satisfy the wants they have created through advertising. By keeping prices low, a business can prevent prospective competitors from entering the market while maximizing its own market share. Here are some of the negative consequences that could occur with penetration pricing.
. An extreme form of penetration pricing is called predatory pricing. Sellers simply follow a market price, or a price set by market leaders. Competition-based pricing is a pricing method that makes use of competitors' prices for the same or similar product as basis in setting a price. So, customer will not object even to a slight price rise later. Furthermore, if the consumers reject product for any reason, the company may have to kiss the industry goodbye. Finally, late adopters might be pleased to get your prestigious product at a bargain price, which creates goodwill for your company.
However, you should decide the price increase that you can afford in order to make your customers satisfied. For those entities already succeeding with premium pricing, they must be aware that a continual, daily emphasis on the premium strategy is the only way to continually charge the highest prices for what they offer. Fewer third parties will be affected negatively by second hand smoke and therefore negative externalities will decrease. Wider Audience Penetration pricing is also an effective strategy for firms looking to enter new market segments. Once the upper class market has been served, the price is lowered to cater to a larger clientele. Introductory prices are low but it becomes difficult to attain the same position in the market when you increase the price. See examples and learn about the benefits and drawbacks of into a market.
Also, once prices are increased, buyers may not be willing to make repeat purchases anymore. Advantages You can stand out. This can cause a problem, because it increases the perception in the minds of consumers that the entire product category is worth less than it used to be. On the other hand, setting a price below the benchmark might result in more units sold but will cause less profit per unit. The company is able to utilize the opportunity to switch over as many customers as possible. The price of competing products is used a benchmark. Lower prices can also engender goodwill among existing customers and encourage new ones to try your services.
Price Skimming Price skimming involves setting high initial prices to recover costs and make huge profits in the early stages of the product's life cycle. This means that when your competitor reduces the price of the product similar to yours then you should also reduce your price. One of the advantages of price skimming is increasing the price of the new launched product. The greater the quantity of output produced, the lower the per-unit fixed cost. Furthermore, some companies risk more and first buy products in bulk for discounts and then implement the penetration pricing strategy. Low pricing reduces the chances to earn good revenue. Disadvantages of penetration strategy The strategy is more often used when wholesalers and businesses, wishing to explore new market, see the potential of their wholesale products or want to build a large market share.