Price skimming and penetration pricing both are pricing strategies used by companies when they launch a new product in the market; however both strategies are different from each other. Let’s look at some of the differences between price skimming and penetration pricing –
- In price skimming strategy the company sets higher price for product when product is newly launched and then gradually decrease the price whereas under penetration pricing strategy the company sets lower price initially and then gradually increase the price of product.
- An example of price skimming would be mobile, laptops and other technological things which when newly launched are sold at higher prices and as time passes price of these products tend to decline. In case of penetration pricing ideal example is various services offered by telecom and satellite companies where they charge lesser initially or even give it for free for first 2 or 3 months and once customer base is set then they increase the price.
- In case of price skimming it is difficult to sell huge quantities because of higher price and hence company has to forgo some sales however it maintains good profit margin over its sales, whereas under penetration pricing company is able to sell in huge quantities because of low price of product however it has to forgo its profit margin because of low price of product.
- Under price skimming the entire focus of company is on creating premium segment of customers who are quality conscious and ready to pay any price for product and hence little attention is given towards the cost aspect of producing the product. However in case of penetration pricing the whole focus is towards reducing the production cost and other costs related to product so that product can be offered at low price to customers which in turn will help the company in capturing the market share quickly.
- In case of price skimming company requires extensive and aggressive marketing of product explaining its features and uniqueness so that company can justify the higher price of product whereas in case of penetration pricing marketing is required but not that much because low price of product lure customers towards the product. In other words marketing costs are higher in case of price skimming as compared to penetration pricing.
As one can see from the above that there are many differences between price skimming strategy and penetration pricing strategy and hence company adopting either of two strategies should carefully examine the benefits and limitations of both the strategies and then decide which strategy is best suited for company’s product.