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B2B Marketing

Pricing Strategy – Penetration or Skimming?

When determining a pricing strategy, it’s important to look at several factors – current market offerings and availability of a product or service, including market saturation, demand for a product or service, and what improvements or innovations will come along for a product or service. It’s important to keep up with how long a product will last on the market before it becomes passe, and then, pricing strategy will have to be reassessed.

Here is a quick look at two, highly-effective pricing strategies, and companies that have used them to a great advantage.

Pricing Strategy 1 – Penetration Pricing

Penetration pricing has been proven to work best in a saturated market, or where services are concerned. The most successful companies that use a penetration pricing strategy include Comcast, AT&T, and similar communications companies. This works well for them, yet not for other companies, such as Hershey Chocolate. Why? Consumer perception.

If a consumer believes that “all cell phone service is the same” or “all Internet service is the same,” then he or she is going to look for the pricing strategy that offers them the lowest price and the sweetest deal. Therefore, the best way to get their interest and loyalty is to offer an introductory price that gradually increases over time. On the other hand, an “introductory price” or price to penetrate the market for chocolate makers doesn’t make much sense, because there is a consumer perception that all chocolate is not the same – Godiva is seen as superior to Hershey by consumers (even though Hershey makes an amazing product all on its own). No introductory pricing is needed.

By testing the market, one can determine if penetration pricing is necessary, and can often wind up avoiding losing profit if the penetration pricing strategy isn’t necessary to gain market share.

Pricing Strategy 2 – Skimming

Skimming can be an extremely effective pricing strategy – especially for innovative products – such as smartphones, televisions, audio products, and the like. Technology lovers, people who love to have new gadgets simply because they are innovative and new, will pay much larger amounts than the average consumer.

Take gaming systems as an example. A technology lover will pay $1,000 for the first console that comes out as new and innovative. Later, when other companies come out with similar consoles, the original tech company can lower their price significantly, and not have missed out on the large profit margin. The competitors, however, will not be able to keep up with the first company, because the market has now been saturated and the technology is perceived as less exciting.

Pricing strategy will depend upon the type of product or service being sold, the amount of market saturation, and, most importantly, customer perception of said product or service. Pricing strategy must be planned accordingly.

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