The offering is not unique or protected by patents, copyrights, or trade secrets.įor example, companies like sell generic items in which they are not proprietary in any way, shape, or form.ģ. If price increases quantity demanded is expected to do the same and vice versa.Ģ. Demand is likely to be price elastic in the target market segments at which the product or service is aimed.Īs price changes quantity demanded is likely to shift. Price penetration strategy should be considered if the business meets these criteria as shown in ‘Strategic Marketing Problems’.ġ. The price skimming strategy uses a high initial price on the one hand and on the other price penetration strategy uses a low initial price. This strategy allows Apple to collect higher total revenue when a model is first released and allows them to reach new customers who have lower acceptable buying rates, over a period of time. When a new model is released it has a high initial price however, as time passes and new models come out the price of the previous model drops incrementally. has been using a price skimming strategy for its’ Apple iPhones. If an offering meets these criteria a price skimming strategy may be the best pricing choice. Usually, businesses will run surveys, focus groups, and collect qualitative data to determine how a customer perceives the offering. However, it wouldn’t be a wise decision to go off of this criterion alone. With a high initial price and proprietary offering the offering tends to have a higher perceived value. There is a realistic perceived value in the product or service.Ĭustomers tend to associate lower prices with lower quality this can usually mark death for a business. When using the price skimming strategy a firm will set a high initial price which will generate higher total revenue.ħ. If an organization is looking to replenish their investment quickly to use the cash for other developmental efforts a price skimming strategy will be effective as long as it meets criteria number one. An organization wants to generate funds quickly to recover its investment or finance other developmental efforts. By understanding the constraints on means of production a firm can compare it with a break-even analysis in order to gain better insights as to how they should set an initial price.Ħ. A business should consider its’ ability to mass-produce products or its’ ability to provide its’ proprietary services. A capacity constraint in producing the product or providing the service exists.Ī capacity constraint deals with the capabilities of the business itself. Although this is criteria to be considered when setting an initial price it is strongly suggested for entrepreneurs to do have some estimate of these possible costs before starting a new venture.ĥ. This question may arise during the planning phase of a new venture where an entrepreneur is unsure of the production costs for manufacturing, selling, warehousing and other production costs along with the potential costs of marketing efforts. Production or marketing costs are unknown. This means you can set a high initial price and it will be difficult for competitors to enter the market or undercut you (if possible).Ĥ. When a business is unique enough to be protected it is considered to be proprietary. The offering is unique enough to be protected from competition by a patent, copyright, or trade secret. There are different price-market segments, thereby appealing first to buyers who have a higher range of acceptable prices.Īs the price over a period of time customers with a lower range of acceptable prices may start to purchase the businesses products or services.ģ. This means a higher price will consist of relatively similar demand.Ģ. Demand is likely to be price inelastic.Īs price changes, demand is unlikely to be heavily influenced. As seen in ‘Strategic Marketing Problems’ here is set criteria to consider before deciding to use this pricing strategy.ġ. This strategy suggests that the price of the offering should be set high initially and decrease incrementally over a period of time in order to speak to consumers at different levels of WTP. The price skimming strategy works best when a new product or service is being introduced to a market. These strategies will allow a firm to price their products or services at a sweet spot for their customer willingness to pay (WTP), or allow the firm to launch into a leading business in the market depending on a differentiating set of criteria. When a business is introducing a new product or service to the market the two best practices for pricing strategies are price skimming and penetration pricing strategies. Following these guidelines is a sure fire way to make sure you're on the right path! They will enable marketers to make better decisions when pricing new offerings. The difference between these two pricing strategies prove themselves to be an important part of the marketing mix.
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