Pricing is an important marketing decision. You cannot change pricing every now and then. So, the pricing decision should be based on data and logic. Wrong pricing strategy alone can ruin any business. There are many strategies for setting a price. The main two strategies for setting price of a new product are skimming pricing strategy and penetration pricing strategy
If you are a marketing manager of a company that is going to launch a new product in the market, which pricing strategy would you suggest to your management? Read on to understand the advantages and disadvantages of both of those pricing strategies.
Table of Contents
Skimming Pricing Strategy
Skimming pricing refers to setting the maximum possible price for a new product. The objective is to maximize the margin.
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 for certain cases. Those are:
- Our product has far better features or quality compared to 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.
- When there is no close competitor who can beat you at price and snatch the market share, you can go with this pricing strategy. For example, Grameenphone followed skimming pricing during its entrance to the Bangladesh market. Citycell was the only competitor, but they were weak and had many problems with their technology.
- When you want to target only the selective portion of wealthy people. In that case, the target audience will feel your product is a matter of prestige. For example, the Mercedes Benz follows this strategy to set very high prices for their new products. People usually pay for the augmented level of the product.
Challenges of Skimming Pricing Strategy
- Having a good number of people buying your product is necessary to be successful with skimming pricing. 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.
- Having demand for unique product features is also crucial. For example, if people thought the cutting edge features of Apple phones will not be needed in their daily life they will not buy the products. However, in reality, people want to have the experience of new technologies. Thus, they have their demand.
- The ideal market for skimming pricing is the one, which is highly sensitive to quality. If you cannot ensure the quality of your products and services then this pricing strategy is not suitable 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 strategy refers to the pricing strategy to set a lower and competitive price for your product to grab as much market share as you can.
As a marketing manager, you would prefer to go for skimming pricing at first. When that strategy is not suitable for you (as described above), then you need to go for a penetration pricing strategy.
The ideal cases for market-penetration pricing are:
- Your product is not unique by any on-demand features
- You are not offering a high-quality premium product
- Your marketing communication is not focusing on a prestigious appeal
- You don’t have a community of people who are already waiting for your new product
- The target market is more price-sensitive than quality sensitive
- 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 hand sanitizer and disinfectant spray.
Due to the COVID-19 pandemic, people have become more hygiene conscious than ever before. 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 get back to the old, tested, and reliable products. Therefore, innovation is not a highly demanded feature when it comes to 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 spray||Suitable for Skimming Pricing Strategy||Suitable for Penetration Pricing Strategy|
|Not possible to have far better features or quality compared to competitors||No||Yes|
|There are many strong competitors already in the market||No||Yes|
|We cannot target only the selective portion of wealthy people||No||Yes|
|We need to get a good number of people for buying our product – specifically middle class and the lower middle class is our ideal customers||No||Yes|
|We are not offering average quality product||No||Yes|
|We cannot focus on prestige in marketing communication||No||Yes|
|We don’t have a community of people waiting for your new product||No||Yes|
|The target market is more price sensitive than quality sensitive||No||Yes|
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 suitable for this case.
Pricing is a significant decision, one percent increase in price can lead to 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, then I would suggest running a test marketing with a pilot project. Market research will ultimately save you rather than assuming to select the pricing strategy.