Market Skimming is basically a marketing strategy that deals with pricing of a product. In this strategy, a producer sets high price for a new product. Normally this pricing strategy is used for high end products like mobile phones, perfumes etc. The objective of this strategy is to reap the maximum revenue from the market before any kind of substitute product is available. After some time when some competitors enter the market, the producer normally lowers the price to capture the rest of the market.
On the other hand, Market Penetration is a strategy which is used by a company to increase the sales of its current prices. The company can lower the prices in this strategy to increase the users of its product or can also come up with bundle offers or variations of existing products.
These are two new product pricing strategies namely market skimming and market penetration. While market-skimming, in its initial phases, sets up high prices, in order to "skim" the revenue layer by layer from the market. It is normally suitable for situations when the quality and image of the product justify and support the premium price. Also when an adequate number of buyers are willing to buy the product at the proposed premium price by the company. Market skimming is also suitable when the cost of production of a small volume of products is not that high. Lastly, market skimming is applicable when the competitors of the product are incapable of accessing the market conveniently. As for market penetration, this pricing strategy involves setting a low initial price in the attempt of penetrating the market on a quick yet productive basis in order to win a large chunk of the market share. In contrast to market skimming, market penetration works when the market of the respective product is highly price sensitive or the production and distribution costs share an inverse relationship with the sales volume. Another suitable situation for market penetration would be when low price plays a prime role in defeating and keeping out the competition.
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.
