Skimming, Market Pricing, and Penetration Pricing Strategy Explained

Skimming, Market and Penetration Pricing Strategy Explained

When launching a product on the market, one of the most important decisions to make relates to deciding its price. 

The price is not just one part of your marketing mix (together with product, place, and promotion) but is the only component of your marketing mix which takes into account the return you are planning on making for your marketing campaign or product launch. 

If you don’t get the pricing right, you may eat up your margins and be unprofitable even in the case of a successful launch. 

Having said this, there is no need to worry. 

The first thing to consider, when making a pricing decision is that pricing is the only variable of the marketing mix that you can change almost in real-time. 

By looking at the adoption curve of your product and at the response you are getting from your target audience you can use pricing dynamically to ignite a sense of scarcity or to sell all remaining inventory on a flash sale. 

In this sense, it’s a good idea to remember that pricing can always be adjusted to reflect the response you’ll be collecting from your market. 

Having said this it’s really important to identify the overall strategies you may want to adopt to achieve your goals. 

In this post, we’ll be looking at three fundamental strategies: skimming pricing, market pricing, and penetration pricing. 

With no further ado, let’s get into it!

Skimming Pricing

Skimming pricing refers to the strategy that brands adopt when launching products above the market price. 

The reasons why newly launched products are initially very expensive may have to do with different reasons. 

First and foremost, at the moment of product launch, a company may need to recoup a lot of its investments connected to research and development. Essentially, a firm has invested in the development of a new product and by charging a higher price, it can make the money back faster.

Another reason why skimming can be a good launch strategy has to do with your brand’s equity. 

If you have a strong and loyal following, chances are your fans will want to be the first to own your new collection, merchandise, or device. 

As a result, your customers may be happy to spend more money to acquire a product that has emotional or social value. 

If your brand has a strong following, then it can be worth taking advantage of this brand equity, to exploit the premium pricing you can charge above your competitor. 

It is also important to remember that once the buzz of the new product has worn out, it may be helpful to think about how you can now lower the price point to make the product accessible or desirable to a broader audience of users. 

That’s what we’re going to discuss next in market pricing. 

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Candlestick Psychology | Price Action Engulfing Pattern | engulfing candle strategy

Market Pricing

In market pricing, you are launching a product (or managing its campaign) by pricing your offer within the same price range as your competitors. 

The idea here is that you want to provide value to your customer in the form of “more for the same” instead of the “more for more” we just discussed in skimming. 

It’s important to notice that market pricing is not settling for what everyone else is charging. 

In many cases brands charge aspirationally, connecting their products to competitors that they wish to compete against. 

Customers use pricing as a clear indicator of quality and prestige, so by simply charing as much as a luxury or brand you can position your brand unambiguously in your customer’s mind as a premium firm. 

At the same time, as discussed previously, after having recouped expenses you may be happy to lower your product’s price to increase market adoption, fully aware of the fact that your profit margin will be reduced (even though a higher sale volume will be beneficial for your revenue).

Market pricing is also the most stable form of pricing, as skimming can work for a limited time, and penetration pricing too can work only within certain time restraints. 

We’re going to address the latter in more detail in the next paragraph.

Penetration Pricing

Penetration pricing is a pricing strategy where firms charge less than the competition in order to compete on price. 

By competing on price a brand has a chance of carving up some market share even in the most competitive markets. 

To some extent, if a business is able to offer “the same for less” it is able to disrupt the competition and build a strong following with all of those customers who until then could not afford the product because it was too expensive for them. 

If you’re interested in understanding market disruption in more detail, here’s an article that can help you learn more about it.

As products dwell in the market for long periods of time, they may lose attractiveness, and as we’ve discussed, after an initial surge in price – at the moment of launch (skimming) – a more market-pricing stage can follow.  

Eventually, a firm may decide to lengthen the lifecycle of the product by reducing the cost with penetration pricing. 

Even if this pricing narrative is the most frequent, it is not uncommon to have a company launch a product at penetration pricing with the goal of attracting new customers by playing the role of the new kid on the block. In some cases, firms provide free trials (in the industries that allow it) with the intent of providing a completely risk-free experience.

As we’ve seen, these pricing strategies don’t have to follow any restrictive rules. 

On the contrary, they show dynamism and adaptability to fit whatever strategic approach you may see fit for your brand. 

Great, now that we’ve covered all relevant topics, let’s draw some conclusive remarks.

Conclusions

There you have it! In this post, we clarified skimming, market, and penetration pricing. To each their own. As your company develops and launches its product onto the market, these three different approaches can help manage the marketing mix in real-time by connecting it to the most lucrative or desirable price point possible. 
It’s always good to work out your pricing strategy by taking into account all of the other variables that might interplay in domestic and international markets. If you’d like to do more research don’t hesitate to explore our blog, where we’ve got a wealth of information and resources to help you navigate the global business. Enjoy!

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