Penetration pricing strategy is effective when certain conditions are present in the market. Firstly, the market should be highly sensitive to price, which means that when a low-priced product is available in the market, customers shift to that product. Hence, low price would bring about market growth and draw a significant number of customers. Secondly, with an increase in sales volumes, the company should be able to decrease its production and distribution costs, i.e. there should be economies of scale.
Brands engage in vicious price wars with the aim of persuading customers to purchase their services and products for the best price. This market penetration strategy becomes complicated and more intense with price adjustments all day long. A company uses penetration pricing when it does not have a presence in a given market. Last, penetration pricing strategies are not useful as long-term strategies. They take effort to create, then a company needs to change direction again and deploy more resources to create long-term value.
Main Difference Between Penetration Pricing and Skimming Pricing Strategies in Points
Android phones, with Samsung leading the herd, are available at a steep discount or are priced at much lower costs compared to Apple, in the hopes that users will become loyal to the brand. This approach also opens a wider range of consumers up to the Android marketplace, while Apple embraces a skimming strategy, providing high-cost products that skim a small market share off the top. A price skimming strategy focuses on maximizing profits by charging a high price for early adopters of a new product, then gradually lowering the price to attract thriftier consumers. For example, a cell phone company might launch a new product with an initial high price, capitalizing on some people’s willingness to pay a premium for cutting-edge technology. When sales to that group slow or competitors emerge, the company progressively lowers its price, skimming each layer of the market until the low price wins over even frugal buyers.
What does price penetration mean?
The penetration pricing strategy involves offering a new product or service at a low initial price to gain customers' attention. The goal is to aggressively get customers in the door with low prices and gain market share.
The low Penetration Vs Skimming Marketing Strategies of the product compels a large number of customers to buy the product, thus generating high sales for the company. Hence, though the profit margin for the company is low, it can generate profits through greater number of sales. Because of greater sales, the company is able to decrease its costs, which allows companies to further decrease their price.
Market Penetration Pricing
Finally, there should be a category of customers in the market who give value to the unique product and wish to be the first ones to buy it; hence, they pay a surplus or premium to acquire it. Apple iPhone can be one of the most famous examples of brands using a skimming strategy. Apple first launched its products at a higher price knowing that people will buy the product. Later on, when the competitors start launching their competitive products, it reduces the price.
Instead of starting high and slowly lowering prices, you instead look to undercut your competitors on price in the beginning and gradually increase your prices. Penetrating pricing is done by setting low prices initially to increase customer demand and to get market share. When the customer accepts the product, overall demand for the products/services increases. On the other hand, skimming pricing is adopted by setting high prices from the start to get high profit margins. In penetration pricing strategy, the new product is introduced at a low price in the market so that it penetrates the market as quickly as possible. The company adds a nominal markup to its cost of production while setting the price of the product.