Differences between price penetration and price skimming

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Differences between price penetration and price skimming

This article explores the differences between price penetration and price skimming. Pricing is a complex issue for any business as price is not simply a number on tag. It is more than that. It comes in many forms and performs many functions (Kotler et al., 2009).  

 

What is price penetration?

According to BPP Learning Media (2010) price penetration refers to pricing a new product low with a view to maximizing market penetration before competitors can enter the market. It is a pricing strategy that many companies use to gain market shares quickly by offering an initial low price to encourage customers to make purchases.

 

What is price skimming?

According to BPP Learning Media (2010) price skimming refers to setting a high initial price for a new product to take advantages of those customers who are prepared to pay a high price for innovation.

 

Differences between price penetration and price skimming

There are many differences between price penetration and price skimming; however, the main ones are outlined below.

 

Price penetration is about lowering the price of a product to secure high sales volumes. On the other hand, price skimming is about setting a high price to skim the profit from the market. However, it is likely to secure low volumes of sales.

 

Price penetration strategy is suitable for products with long anticipated life cycles. On the other hand, price skimming is suitable for products that have short life cycles, or which will face competition at some point in the future.

 

Price penetration strategy enable companies to sell products in large quantities as they are priced low. Conversely, price skimming strategy allows them to sell products in smaller quantities as they are priced high.

 

The profit margin is low when price penetration is applied. Conversely, the profit margin is high when price skimming is applied. Similarly, price skimming is a short-term revenue strategy, while price penetration is a long-term revenue strategy.

 

In penetration pricing, companies focus on lowering prices to attract customers. On the other hand, with price skimming they rely on having a unique product/service that is in high demand. This helps them raise the price while the market catches up (Dill, 2019).

 

Examples of price penetration

Application of price penetration strategy is often seen in mass market products e.g. chocolate bars, food stuffs, household goods, etc. Many new food items are introduced to the market with a price penetration strategy. It is worth mentioning that even big services such as WhatsApp and Netflix have used this pricing strategy.

 

According to Kotler et al. (2009) Texas Instruments, an American technology company, has used price penetration for years. It would build a large plant and set its prices as low as possible. Once it secures a large market share and costs start falling, it cut prices further.

 

Examples of price skimming

Companies often use price skimming strategy to sell products such as smart phones, jewelry, digital technologies etc. Apple, Samsung, Sony, and many others often use this strategy as they know their products are high in demand.

 

Conclusion

As shown above, there are many differences between price penetration and price skimming. Companies may use price penetration to introduce a new market which has no to little differentiation. On the contrary, they many use skimming pricing strategy for unique products that face little to no competition.

 

Hope you have liked this article ‘Differences between price penetration and price skimming’. Please share it with others to support our work. You may also find the following articles useful:

Pricing strategies in marketing

Differences between business market and consumer market

 

Last update: 30 March 2022

References: 

BPP Learning Media (2010) Marketing Principles, 2nd edition, London: BPP Learning Media Ltd

Dill, S. (2019) Three steps to choose your pricing strategy, available at: https://www.forbes.com/sites/forbesbusinesscouncil/2019/11/26/three-steps-to-choose-your-pricing-strategy/?sh=520fd0ef2469 (accessed 30 March 2022)

Kotler, P, Keller, K. Brady, M., Goodman, M., & Hansen, T. (2009) Marketing Management, 1st European Edition, UK: Pearson Education Limited

Author: M Rahman

M Rahman writes extensively online with an emphasis on business management, marketing, and tourism. He is a lecturer in Management and Marketing. He holds an MSc in Tourism & Hospitality from the University of Sunderland. Also, graduated from Leeds Metropolitan University with a BA in Business & Management Studies and completed a DTLLS (Diploma in Teaching in the Life-Long Learning Sector) from London South Bank University.