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Concept Version 9
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New Product

Penetration and skimming are two strategies employed in pricing new products.

Learning Objective

  • Compare penetration and skimming as two strategies for setting a price level


Key Points

    • Penetration pricing in the introductory stage of a new product's life cycle involves accepting a lower profit margin and pricing relatively low.
    • Price skimming involves setting the price relatively high to generate a high profit margin.
    • A premium product generally supports a skimming strategy.

Terms

  • pull strategy

    communication not demanded by the buyer

  • Price skimming

    This involves the top part of the demand curve. The price is set relatively high to generate a high profit margin, and sales are limited to those buyers willing to pay a premium to get the new product.

  • Penetration pricing

    The introductory stage of a new product's life cycle means accepting a lower profit margin and to price relatively low. Such a strategy should generate greater sales and establish the new product in the market more quickly.

  • push strategy

    communication demanded by the buyer


Full Text

With a totally new product, competition does not exist or is minimal. What price level should be set in such cases? Two general strategies are most common: penetration and skimming. Penetration pricing in the introductory stage of a new product's life cycle involves accepting a lower profit margin and pricing relatively low. Such a strategy should generate greater sales and establish the new product in the market more quickly. Price skimming involves the top part of the demand curve. Price is set relatively high to generate a high profit margin, and sales are limited to those buyers willing to pay a premium to get the new product.

Price Skimming

Video game systems, such as the Sony PS3, usually employ the classic new product pricing strategy, known as skimming.

Which strategy is best depends on a number of factors. A penetration strategy would generally be supported by the following conditions: price-sensitive consumers, opportunity to keep costs low, the anticipation of quick market entry by competitors, a high likelihood for rapid acceptance by potential buyers, and an adequate resource base for the firm to meet the new demand and sales. A skimming strategy is most appropriate when the opposite conditions exist. A premium product generally supports a skimming strategy. In this case, "premium" doesn't just denote high cost of production and materials, it also suggests that the product may be rare or that the demand is unusually high. An example would be a $500 ticket for the World Series or an $80,000 price tag for a limited-production sports car. Having legal protection via a patent or copyright may also allow for an excessively high price. Intel and their Pentium chip possessed this advantage for a long period of time. In most cases, the initial high price is gradually reduced to match new competition and allow new customers access to the product.

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