Pricing strategies usually change as the product passes through its life cycle as illustrated in the previous lesson.
New Product Pricing
Pricing strategies usually change
as the product passes through its life cycle as illustrated in the previous
lesson. The introductory stage is especially challenging. Firms bringing out an
innovative patent-protected product can choose between two options, viz.
market-skimming pricing and market-penetration pricing.
firms that invent new products initially set high prices to ‘skim’ revenues
layer by layer from the market. At product introduction in the marketplace, the
firm may charge the highest price it could given the benefits of its new
product over competing products. The firm sets a price that made it just
worthwhile for some affordable segments of the market to adopt the new product.
After the initial sales slowdown,
the firm may lower the price to draw in the next price sensitive layer of the
customers. In this way, a firm skims a maximum amount of revenue from the
various segments of the market. It is important to note that skimming works
well only under certain conditions.
The quality and image must
support its higher price and enough buyers must want the product at that price.
Also the cost of producing a small volume cannot be so high that they cancel
the advantage of charging more. In the mean time, competitors should not be
able to enter the market easily and undercut the price. A skimming strategy
offers several benefits to the markets, as listed below:
1. It allows a manufacturer to
quickly recover its research and development costs.
2. It also allows a firm to maximize
revenue from a new product before competitors enter the field.
3. A skimming strategy offers a
useful tool for segmenting a product’s overall market on a price basis.
4. It permits marketers to control demand
in the introductory stages of a product’s life cycle and then adjust productive
capacity to match demand.
The chief disadvantage of skimming strategy is: it
attracts competition. Potential competitors see innovative firms reaping big
financial gains and decide to enter the market. This new supply forces the
price even lower than its eventual level under a sequential skimming procedure.
However, if patent protection or other proprietary ability allows a firm to
exude competitors from its market, it may continue a skimming strategy for a
relatively long period.
Rather than setting a high
initial price to skim off small but profitable market segments, some firms set
a low initial price in order to penetrate the market quickly and deeply – to
attract a large number of buyers quickly and win a large market share. A
penetration pricing strategy may also extend over several stages of the product
life cycle as the firm seeks to maintain a reputation as a low-price
competitor. Since many firms begin penetration pricing with the intention of
increasing prices in the future, success depends on
generating many consumer trial purchases.
1. Penetration pricing works well
under the following conditions:
2. A good or service experiences highly elastic demand
3. The market is highly price
sensitive and a low price stimulates market growth
4. Production and distribution costs
fall with accumulated production experience
5. A low price helps discourage actual and potential
Tags : MARKETING MANAGEMENT - Pricing Methods
Last 30 days 1029 views