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Difference between Penetration and Skimming Pricing Strategy
A customer's decision to buy is informed by various criteria, including the product's price, quality, availability of other brands, and consumer interest in those products. One of the most crucial elements of the marketing mix is the price at which a product is sold.
Despite the high quality of the supplied product or service, sales may be affected by the chosen pricing strategy. Therefore, businesses should carefully evaluate many factors while setting prices. Important pricing strategies include market penetration and "skimming" current clients. Let's look at the differences between the two by comparing them.
What is Penetration Pricing Strategy?
Using this pricing approach, a brand−new product is introduced to the market at a price that is much lower than its rivals to promote better market penetration. If there is a rise in demand, the price might go up. Reduced earnings in the short run are a natural consequence of using a penetration pricing strategy, but the strategy's long−term payoff of better profits and a wider customer base more than makes up for the initial hit.
When these conditions are met, the penetration pricing approach is most effectively implemented −
When a popular company debuts a new product, competitors often follow suit with copies. The price drop encourages consumers to buy brand−new goods.
When a business needs to quickly increase sales, offering a discounted price might entice customers to make a purchase they hadn't planned on making.
When a company wants to slow the influx of brands selling similar products into their sector of the market.
The following are some of the benefits of using penetration pricing −
More rapid growth in demand is a direct result of the cheaper pricing.
Increased speed in the spread of brand recognition.
The exponential growth of both the company's client base and its market share.
Certain brands may appeal more to budget−conscious consumers.
On the other side, some of the drawbacks are as follows −
It has the potential to hasten the onset of pricing wars.
People may assume that if the price is lower, the quality of the goods is also lower.
The initial stages of operation often result in lower profits.
What is Skimming Pricing Strategy?
In this pricing approach, the high cost of a brand−new product is justified in large part by the substantial markups that must be paid to get it to market. Often, the high price is set before new rivals have a significant market share. This tactic is generally used for products with very low or nonexistent levels of market competition.
The following are some examples of situations in which companies use the skimming pricing strategy −
Demand inelasticity is seen at the beginning of a product's marketing cycle. The process will be repeated until the product is successfully positioned in the market.
When supply and demand for the products are both unknown. This is true at all stages of the process, but especially at the start. In this case, everyone benefits from the high prices since they cover the high costs of production.
If the price of production is high, to begin with. The substantial asking price is justified by the substantial sums invested in advertising the products.
The following are some advantages of using a skimming pricing strategy −
Higher−priced items typically indicate a higher−quality product.
Beginning businesses have a better chance of turning a healthy profit.
This environment is ideal for cutting−edge concepts and premium goods due to the lack of intense competition.
On the other side, some of the drawbacks are as follows −
Reducing pricing at a later time will affect the company's bottom line and reputation.
If other companies begin offering the same products at lower prices, the company might suffer losses.
The high prices are a contributing factor to the falling demand.
Demands for products made with care and attention to detail.
Differences: Penetration and Skimming Pricing Strategy
The following table highlights how the penetration pricing strategy is different from the skimming pricing strategy −
|Characteristics||Penetration Pricing Strategy||Skimming Pricing Strategy|
|Definition||The term "penetration pricing" describes a pricing strategy in which a new product is initially supplied to the market at a discounted price.||Skimming, as a pricing strategy, is the process of setting a high price for a product by adding substantial markups to its initial sale price.|
|Objective||"Penetration pricing" is a strategy used to enter a market swiftly and easily.||Skimming pricing is used in product launches with the intention of increasing market share.|
|Demand||Penetration pricing is used as a technique when the demand for the product is flexible.||Skimming is a pricing approach used when there is little variation in demand over time.|
|Sales quantity||Penetration pricing, because of its cheap prices, can result in high volumes of sales.||Overcharging customers by skimming the top of the price leads to fewer sales.|
|Profit margins||Profit margins are low when penetration pricing is used.||High−profit margins are a direct effect of price skimming.|
If you're trying to break into a new market, you can try a pricing technique called "penetration pricing," in which you release your product at a steep discount. It's effective for commodities with few or no distinctive features.
In contrast, "skimming pricing" is a pricing strategy that refers to the practice of charging substantial markups for a new product, which results in the product's high price. For products with no direct competition, this strategy excels.
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