Question

Clearly and concisely explain under what circumstances would companies introduce new products using a market skimming pricing strategy and under what circumstances a market penetration pricing strategy? Explain each approach providing examples to demonstrate your understanding.

Answer 1

Price skimming is a strategy that a company uses wherein when the product is launched the company keeps a higher price so that better profits can be earned, when the product becomes old the company reduces the price so that the customers who liked the product but were not able to purchase that because of the price can now purchase it. Companies can use skimming technique when the product quality is great and the estimation is that people who prefers quality would buy the product regardless of the pricing, example- Apple iPhone.

Penetration pricing is a technique wherein the company sells the product at such a lower price that the entire competition goes down i.e. it penetrates the market in such a way that competitors do not get a chance to stand because the price is too low. Companies can use them when the product is not built for just revenue making and there is another product which is giving enough revenue to the company and the initial goal is to capture the market rather than earn profits. Example- Facemasks