What is Price Skimming? Definition, Pros Cons & Examples

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This prevents healthy competition and thus is banned in many countries. Predatory pricing involves setting prices below the market price to force competitors out of the market. Another successful adoption of price penetration is by Android phone brands, most notably Samsung. Ask Any Difference is made to provide differences and comparisons of terms, products and services. However, the companies that sell these products adopt different strategies and techniques in order to sell their product to the customers. Penetration pricing is suitable for markets with high price elasticity that increases sales with lower prices. Whereas, skim pricing is suitable for markets with price inelasticity where sales do not increase with a change in prices.

Pricing Strategy

Over the past five years, we estimate the firm has increased Internet access market share in the areas it serves from about 56% to 64%, with share coming nearly entirely from the phone companies. While that share shift may seem modest, it implies that Comcast’s customer base in a given area is now more than 60% larger on average than its rivals’, up from around 20%. Most consumers continue paying the higher bill, but some jump to a new provider offering an introductory rate. Some carriers offer customers inexpensive or free smartphones in return for a long-term contract. Technology companies creating the phones employ this strategy too. Android phones are often priced low so customers build brand loyalty and Android achieves greater market penetration. They charge as high a price as customers will pay and slowly lower it.

While it increases its profit margin, the final price per unit still remains below the penetration vs skimming pricing competitor’s price. The company expects to capture the market share in the beginning.

Similarities between Penetration and Skimming pricing strategy

Predatory pricing removes the possibility of healthy competition and doesn’t benefit consumers. They offered low prices to save the customers’ two days of waiting for their DVDs in the mail. In 2007, they introduced a streaming service, and after that, they have become popular. Low prices and easy accessibility can help attract customers away from Redbox.

Over time, prices will reduce to levels comparable to market prices in order to capture the rest of the market. The main objective of the penetration pricing strategy is to attract customers and increase sales by penetrating the market.

Objectives

Its opposite can be the slow penetration strategy where a low promotion is done by keeping the prices of products low as well. Market penetration and market skimming price are well known terms in the field of finance and economics. These terms are used for the products and services in the market. Let’s understand the difference between market penetration and market skimming price. There are some customers who are willing to pay the high price to acquire an exclusive product before it becomes mainstream. Hence, in markets where customers are willing to pay a price differential to acquire a latest product, skimming pricing is more relevant.

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• On the other hand, with a niche market of highly selective customers, skimming may work better.
• When the buyer lists what he or she wants to buy and also states how much he or she is willing to pay.
• Finally, it is important to take into account that price skimming works best in high-priced industry segments.
• Penetrating strategy targets high sales at the beginning and the skimming strategy target high profits in the beginning.
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Smartphone providers, such as Android, use a penetration pricing strategy to win new customers and create loyalty to the brand. Strategies such as pre-emptive pricing or extinction prices involve setting low prices to eliminate competition and discourage potential new entrants. Penetration pricing, similar to loss leader pricing, can be a successful marketing strategy when applied correctly.

Profit margins

Deploying this pricing strategy strategically can be a sure shot way to get a loyal customer following and establish your foothold in the highly competitive market place. Android phones, with Samsung leading the herd, are available at a steep discount or are priced at much lower costs compared to Apple, in the hopes that users will become loyal to the brand. This approach also opens a wider range of consumers up to the Android marketplace, while Apple embraces a skimming strategy, providing high-cost products that skim a small market share off the top.

• The lower price helps a new product or service penetrate the market and attract customers away from competitors.
• By contrast, price penetration is often used for less exclusive goods such as cosmetics and groceries.
• The strategy will help them to attract new customers away from competitors and retain them when rates go up to normal levels afterward.
• The price skimming strategy aims to generate high profits in the beginning when a new product is launched.
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This indicates that the company uses a penetrating strategy for its prices and has successfully attracted millions of users. On the other hand, skimming pricing achieves small sales due to the high pricing. However, skimming pricing is used when the product demand is inelastic. A brand is introducing a new product in the market that is also provided by other brands. A pricing strategy in which buyers pays the same shipping charges regardless of their locations. Discounts for paying cash for large purchases and seasonal discounts to get rid of inventory and holiday items are other examples of price adjustments.

What Is a Penetration Pricing Strategy?

Now let’s assume that Apple sets a unique and invariable price that does not change over time, or in other words, it does not use price skimming. If Apple sets their price at p1 level, only the early adopters will buy the product. If they decide to set the price at p2, both category 1 and category 2 will purchase the good, but category 1 will buy at p2. https://quickbooks-payroll.org/ And finally, if they set the price at pc, every type of customer will buy the phone at this price, including categories 1 and 2. Whereas a new iPhone is very expensive, its price decreases gradually over time. One year after the release however, the price of the iPhone will be decreased and more consumers will therefore be in a position to afford it.

• Penetration pricing comes with the risk that new customers may choose the brand initially, but once prices increase, switch to a competitor.
• Users of price skimming hope to pocket significant profit from initial customers and maintain high enough prices over time to maintain steady long-term profit from value-oriented buyers.
• Firstly, the product should be one that is unique and introduces features for the first time in the market.
• Initially setting the price low prevents competitors’ entry into the market.