Market Skimming and Penetration Pricing Strategies
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Market Skimming Pricing: Market skimming pricing, also known as price skimming, is a strategy where a company sets a high initial price for a new or innovative product, targeting customers who are willing to pay a premium to be early adopters. The goal of this strategy is to “skim” the maximum revenue from the market before competitors can enter and drive prices down. Over time, the price is gradually lowered to attract more price-sensitive customers, thereby capturing additional market segments. This approach is often used for high-tech products, luxury items, or any product that is perceived as having a significant innovation or prestige factor. For example, Apple often employs a market skimming strategy with the launch of new iPhones, starting with a high price point that is gradually reduced as newer models are introduced.
Penetration Pricing: In contrast, penetration pricing is a strategy where a company sets a low initial price for a new product to quickly attract a large number of customers and gain market share. The idea is to “penetrate” the market quickly and establish a strong customer base, often at the expense of short-term profits. Once the product has gained a significant market presence, the company may gradually increase the price. Penetration pricing is typically used in markets with strong competition or where economies of scale can significantly reduce costs as production increases. A classic example is Netflix, which initially offered low subscription rates to attract a broad audience and establish itself as a market leader in streaming services.
In summary, market skimming pricing focuses on maximizing short-term profits by targeting premium segments with high initial prices, while penetration pricing aims for rapid market share growth through low initial prices, often sacrificing early profitability for long-term market dominance.