Skimming and Penetration Pricing

It is a pricing method in which a marketer sets a fairly high cost for a services or product initially, then decreases the price with time. The purpose of such technique is to make greater earnings within the short run period in order to recuperate the costs sustained in item looking into, making, marketing etc. due to the fact that such expenses connected with the item are high.

However this strategy brings with it the threat of approval of the item in the market as other competitors might tend to decrease their price variety of the exact same item consequently forfeiting a big part of the marketplace share.

Then they lower the cost to bring in other clients, more price-sensitive sector.

Therefore, the skimming strategy gets its name from skimming succeeding layers of client sections, as prices are decreased with time.

Example:

When Sony presented the world's very first high meaning television to the Japanese market in 1990, the state-of-the-art sets cost ,000.

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These televisions were acquired only by client who could manage to pay a high price for the brand-new technology. Over the next several years, Sony rapidly lowered the cost to bring in new purchasers. By 1993, a 28-inch HDTV cost a Japanese buyer simply over $6,000. In 2001, a Japanese consumer might buy a 40-inch HDTV for about $2000, a rate that a lot more consumers might pay for. In this way, Sony skimmed the maximum quantity of earnings from the different segments of the marketplace.

Strategy

You can typically divide cost skimming into three distinct stages.

Stage One:

Throughout the very first stage, the item is set at its highest cost. This usually occurs during the item's preliminary launch when the business is targeting early adopters - those individuals that just have to have the current and greatest thing, like the most recent smart phone, and cost isn't too much of an issue. The company's revenue margins will be as high as they ever will be.

Phase Two:

The second phase occurs when the early adopters have made their purchases and it's time to increase your market share by getting a larger cross-section of your target market. You do this by decreasing the price sufficiently to induce a reasonable percentage of your target market to consider the purchase of your product. Your profit margin will decrease, but your sales volume and market share will increase.

Phase Three:

Finally, when sales have started to decline, it's time for the third phase where the price is reduced even further to attract discount shoppers. Again, the profit margin will decrease.
The product is probably near the end of its life cycle as it enters this phase of pricing.

APPLE’S twist to the Skimming

Apple has added a twist to the skimming strategy. Rather than introducing their products at a high price and then lowering their prices later, Apple ventures out a price and then maintains and defends that price by significantly increasing the value of their products in future lines. For example, over the past six years, the average sales price of the iPhone has remained remarkably stable with the subsidized price (a price for a product that is reduced because the government has paid part of the cost of producing it) remaining at $200 and the unsubsidized price (price that is paid by the customer and not partly paid by government) hovering around $650.

The argument against Apple’s price skimming strategy is that the competition has caught up with the iPhone and Apple is no longer able to compete unless they lower their prices. But do the facts support this argument?

First, the iPhone has received 9 awards for customer satisfaction Second, in 2012, Apple gained 69% of all mobile phone profits. Further, they did it with only 8% of the total market share. That’s price skimming at its finest.

Apple has some 70% market share in iPods and around 50% market share in iPads. Yet they are doing this while still maintaining their price skimming strategy. Price skimming is neither the only strategy nor is it the only superior strategy. It is just one of many marketing strategies. However, Apple is executing the strategy of price skimming brilliantly.

A famous example of this was the initial release of the Apple iPhone. Apple released the iPhone on Sept. 5, 2007, for $599. Apple fans rushed out to purchase the iPhone. Two months later, Apple lowered the price to $399 to capture even more customers. The earliest adopters paid $200 more for the privilege of being first. In this case, though, Apple got a black eye. The huge price decrease was too much too soon according to the early adopters as these early adopters were big fans and Apple risked losing significant customer goodwill from their best customers. Apple eventually gave each of the early adopters a $100 store credit. Skimming as a market entry strategy only works when you have a monopolistic position (the iPhone was unique). The lesson from Apple's case is to bring your price down slowly. The news articles at the time didn't criticize Apple for lowering the price, but they criticized it for lowering the price too soon.

MARKET-PENETRATION STRATEGY

A marketing strategy used by firms to attract customers to a new product or service. Penetration pricing is the practice of offering a low price for a new product or service during its initial offering in order to attract customers away from competitors. The reasoning behind this marketing strategy is that customers will buy and become aware of the new product due to its lower price in the marketplace relative to rivals.

Assumptions:

The product does not have a particular price-market segment. (company sets more than one price for a product without experiencing significant differences in the costs of producing or distributing the product) It has elasticity of demand (buyers are price sensitive).

The market is large enough to sustain relatively low profit margins. The competitors too will soon lower their prices.
For instance,

Lay's Stax: The Lay's Stax were introduced in late 2003 by Frito-Lay. Being a close substitute for Pringles, Stax were aggressively priced well below $1 at launch to lure customers who previously purchased Pringles. Pringles totally had the market cornered on stackable potato chips until Lays came out with Stax. The curved shape and texture of the chip were virtually the same. The tall, cylinder-shaped can was nearly identical, too. During the first few months of the product launch, cans of Stax were available for $0.69 in grocery stores. People even preferred Stax over Pringles for its gluten free taste rather than the price solely. After the initial penetration strategy to draw customers, the common supermarket price rose above $1 after few months.