New Product Pricing Strategies
Pricing strategies usually change as the product passes through its life cycle.The introductory stage is quite challenging. Companies bringing out a new product face the challenge of setting prices for the first time. They can choose between two broad strategies.
1. Market Skimming Pricing:
It is setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price and the company makes fewer but profitable sales.
For example: Sony frequently uses this strategy. When Sony introduced the world’s first high definition television to the Japanese market in 1990, the high tech sets cost $43000. Then these televisions were purchased only by customers who could afford to pay high price for the new technology. Sony rapidly reduced the price over the next several years to attract new buyers.
Market skimming makes sense only under certain conditions.
1. The product’s quality and image must support its higher price.
2. Enough buyers must want the product at that price.
3. Competitor should not be able to enter the market easily and undercut the high price.
2. Market Penetration Pricing:
It is setting a low price for a new product in order to attract a large number of buyers and a large market share. They set a low initial price in order to penetrate the market quickly and deeply to attract a large number of buyers quickly and win a large market share.
For example: Wal-Mart and other discount retailers use penetration pricing.
Dell used penetration pricing to enter the personal computer market, selling high quality computer products through lower cost direct channels.
Several conditions must be met for this low price strategy to work.
1. The market must be highly price sensitive so that a low price produces more market growth.
2. Production and distribution costs must fall as sales volume increases.
3. Low price must help keep out the competition and the penetration pricer must maintain its low price position.
Pricing strategies usually change as the product passes through its life cycle.The introductory stage is quite challenging. Companies bringing out a new product face the challenge of setting prices for the first time. They can choose between two broad strategies.
1. Market Skimming Pricing:
It is setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price and the company makes fewer but profitable sales.
For example: Sony frequently uses this strategy. When Sony introduced the world’s first high definition television to the Japanese market in 1990, the high tech sets cost $43000. Then these televisions were purchased only by customers who could afford to pay high price for the new technology. Sony rapidly reduced the price over the next several years to attract new buyers.
Market skimming makes sense only under certain conditions.
1. The product’s quality and image must support its higher price.
2. Enough buyers must want the product at that price.
3. Competitor should not be able to enter the market easily and undercut the high price.
2. Market Penetration Pricing:
It is setting a low price for a new product in order to attract a large number of buyers and a large market share. They set a low initial price in order to penetrate the market quickly and deeply to attract a large number of buyers quickly and win a large market share.
For example: Wal-Mart and other discount retailers use penetration pricing.
Dell used penetration pricing to enter the personal computer market, selling high quality computer products through lower cost direct channels.
Several conditions must be met for this low price strategy to work.
1. The market must be highly price sensitive so that a low price produces more market growth.
2. Production and distribution costs must fall as sales volume increases.
3. Low price must help keep out the competition and the penetration pricer must maintain its low price position.
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