Pricing Strategy - Skimming vs. Penetration

Pricing Strategy: Skimming vs. Penetration

Pricing is an important marketing decision. You cannot change pricing now and then. So, the pricing decision should be based on data and logic. A wrong pricing strategy alone can ruin any business. There are many strategies for setting a price. The main two methods for setting the price of a new product are skimming pricing strategy and penetration pricing strategy.

If you are a marketing manager of a company that will launch a new product in the market, what pricing strategy would you suggest to your management? Read on to understand both pricing strategies’ advantages and disadvantages.

Skimming vs. Penetration Pricing

Pricing strategy is one of the most important decisions entrepreneurs must make when starting or growing their businesses. Of course, there are many ways to price your product. But the most popular two types of pricing available for your business are penetration pricing and skimming pricing.

Penetration Pricing:

This type of pricing aims to ensure that you’re making money as quickly as possible by selling many products at a low price.

Skimming Pricing:

This tactic involves charging a high initial price to establish market dominance or gain monopoly status. The company then lowers the cost over time to attract

Skimming Pricing Strategy

Skimming pricing refers to setting the maximum possible price for a new product. The objective is to maximize the margin.

A higher price refers to a lesser number of sales. That will also result in less amount in revenue. That is why the skimming price strategy is only feasible in some instances. Those are:

  1. Our product has far better features or quality than competitors: In that case, the customers will be ready to pay the premium to get the best out of their available options. For example, Apple follows this strategy for its unique product offerings.
  2. You can go with this pricing strategy when there is no close competitor who can beat you at a price and snatch the market share. For example, Grameenphone followed skimming pricing while entering the Bangladesh market. Citycell was the only competitor, but they were weak and had many problems with their technology.
  3. When you want to target only a select portion of wealthy people, in that case, the target audience will feel your product is a matter of prestige. For example, Mercedes Benz follows this strategy to set high prices for its new products. As a result, people usually pay for the augmented level of the product.

Challenges of Skimming Pricing Strategy

  1. Having a good number of people buying your product is necessary to successfully skimming pricing. However, before setting such a price, companies should conduct a market survey. For example, a diamond-depicted mobile phone will not have enough demand in developing countries.
  2. Having demand for unique product features is also crucial. For example, if people thought the cutting-edge features of Apple phones would not be needed in their daily life, they would not buy the products. However, in reality, people want to experience new technologies. Thus, they have their demand.
  3. The ideal market for skimming pricing is the one that is highly sensitive to quality. If you cannot ensure the quality of your products and services, then this pricing strategy is unsuitable for you.

Penetration Pricing Strategy

Market penetration is difficult for a well-established industry. Moreover, in most cases, you will not have an innovation to offer and disrupt the market. In that case, the pricing needs to be competitive enough to stay in the market and compete with all options.

Penetration pricing is the pricing strategy to set a lower and more competitive price for your product to grab as much market share as possible.

As a marketing manager, you would prefer to go for skimming pricing at first. However, when that strategy is not suitable for you (as described above), you need to use a penetration pricing strategy.

The ideal cases for market-penetration pricing are:

  1. Your product is not unique by any on-demand features
  2. You are not offering a high-quality premium product
  3. Your marketing communication is not focusing on a prestigious appeal
  4. You don’t have a community of people who are already waiting for your new product
  5. The target market is more price-sensitive than quality sensitive
  6. There are competitors to beat you if you set a higher price than the market average

Pricing Strategy Example

To be specific, let us assume that our company wants to launch a hand sanitizer and disinfectant spray.

Due to the COVID-19 pandemic, people have become more hygiene conscious than ever. However, people are not looking for expensive hygiene products for their daily usage. They are also not looking for innovative products which are not tested and reliable.

Usually, during crises and recessions, people return to the old, tested, and reliable products. Therefore, innovation is not highly demanded regarding health and hygiene-related products.

As per the above analysis, let us summarize the characteristics to check the fitness of the pricing strategy.

Aspects of hand sanitizer and disinfectant spraySuitable for Skimming Pricing StrategySuitable for Penetration Pricing Strategy
Not possible to have far better features or quality compared to competitorsNoYes
There are many strong competitors already in the marketNoYes
We cannot target only the selective portion of wealthy peopleNoYes
We need to get a good number of people to buy our product – specifically middle class and the lower middle class are our ideal customers.NoYes
We are not offering average-quality productNoYes
We cannot focus on prestige in marketing communicationNoYes
We don’t have a community of people waiting for your new productNoYes
The target market is more price sensitive than quality sensitiveNoYes
Skimming Pricing and Penetration Pricing

As per the above table, it is clear that the skimming pricing strategy isn’t suitable for launching hand sanitizer and disinfectant spray in a developing country. Rather penetration pricing strategy will be ideal for this case.

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Pricing is a significant decision; a one percent increase in price can lead to an 8.7% increase in operating profit.

Most marketers would love to go for a skimming pricing strategy. However, the product, market, and competitors determine the right pricing strategy.

If you aren’t sure about the right pricing strategy for your product, I suggest running a test marketing with a pilot project. Market research will ultimately save you rather than assuming to select the pricing strategy.