Pricing Strategies

Price is a very important factor for any product as it is instrumental in affecting how well it sells and how large a company's margins are. Companies must ensure that their product is not priced too low to signal poor quality and shrink margins or too high, which may decrease repurchases and orders in general. There are numerous strategies that companies can pick from when pricing products. In this blog I will discuss the strategies of market skimming and market penetration and how companies use them to launch new products.

Market skimming

Market skimming is a pricing strategy in which a company charges the highest initial price that customers are willing to pay and then lowers it over time. The price is lowered once the demand of customers willing to pay more has been satisfied (Hayes.A, 2022). This is a very useful strategy for big companies like Apple when they want to launch new products as they can successfully gather as much revenue from each customer group before lowering the price to focus on the next group of customers. 

However, the strategy is hard to achieve as it requires a strong brand, loyal customers, strong product image and quality, all features that Apple and its products have. Image 1 shows how Apple waits much longer to drop the price of their products than other tech companies. This also results in the perceived quality and worth of their products remaining high (Bathelt. A, 2021).

Image 1: (Bathelt. A, 2021)

Market penetration

Penetration pricing is another strategy used to attract customers to new products and services. It is achieved by initially offering the product at a low price. This attracts customers away from competitor companies and reach a wide audience. Upon doing this, the company can try to build its market share and slowly raise prices over time to more normal levels (Kenton. W, 2023).

Image 2: (Prisync, 2018)

The strategy is often used by new companies or in new markets as they aren't as established. For example, Hyundai used this strategy when entering the US market by keeping prices lower than Toyota and Honda, which paid off as they are now the third largest automobile company in the US (Keene. M, 2022). Netflix also adopted this and have slowly increased the price of their subscription as seen in Image 2 (Prisync, 2018). However, if the price increases too high, something Netflix has done, it may result in customers choosing alternatives. This is one of the contributors to Netflix losing subscribers to other streaming services such as Disney Plus.

Reference List:

Bathelt, A. (2021) How does Apple use being a luxury brand? - Case study of a skimming strategy | Blog Dealavo. [Image 1] Available at: https://dealavo.com/en/apple-skimming-case-study/ (Accessed: 23 February 2023)

Prisync (2018) Penetration Pricing: Definition, Advantages & Disadvantages. [Image 2] Available at: https://prisync.com/blog/penetration-pricing/ (Accessed: 24 February 2023)

Hayes, A. (2022) Price Skimming Definition: How It Works and Its Limitations. Available at: https://www.investopedia.com/terms/p/priceskimming.asp (Accessed: 23 February 2023)

Kenton, W. (2023) Penetration Pricing Definition, Examples, and How to Use It. Available at: https://www.investopedia.com/terms/p/penetration-pricing.asp (Accessed: 24 February 2023)

Keenan, M. (2022) Penetration Pricing: Win Market Share and Profitability. Available at: https://www.shopify.com/uk/retail/penetration-pricing (Accessed: 24 February 2023)