on, after costs are incurred, and almost
without regard for the market or the
marketing mix. To be most effective,
the various business functions should be
integrated. Each should have an impact
on all marketing decisions.
When doing the pricing, it is important
to significantly consider the environment
and look at the life stage of the product,
whether it’s new in the market or has been
in existence for a while. To do this you
need to conduct product life cycle analysis
so that you can come up with pricing that
is flexible enough to match the varying
marketplace characteristics at different
life cycle stages.
Price Skimming and Price
Penetration Strategy
Two basic strategies that may be used in
pricing for new products are skimming
pricing and penetration pricing depending
on the life stage of a given a product.
Price skimming is the strategy of
establishing a high initial price for a
product with a view to "skimming the
cream off the market" at the upper end of
the demand curve. It is accompanied by a
heavy expenditure on promotion.
A skimming strategy may be recommended
when the nature of demand is unknown,
when a business has spent large sums
of money on R&D for a new product,
when the competition is expected to
develop and market a similar product in
the near future, or when the product is so
innovative that the market is expected to
mature very slowly.
Under these circumstances, a skimming
strategy has several advantages. At the
top of the demand curve, price elasticity
80 MAL30/19 ISSUE
A skimming strategy may be recommend-
ed when the nature of demand is unknown,
when a business has spent large sums of
money on R&D for a new product, when the
competition is expected to develop and mar-
ket a similar product in the near future, or
when the product is so innovative that the
market is expected to mature very slowly.
is low. Besides, in the absence of any close
substitute, cross-elasticity is also low. probably the most important reason for
adopting a penetration strategy.
These factors, along with a heavy
emphasis on promotion, tend to help the
product make significant inroads into the
market. The high price also helps segment
the market. Only non-price-conscious
(early adopters) customers will buy a new
product during its initial stage. Later
on, the mass market can be tapped by
lowering the price. The penetration strategy is also used to
discourage competitors from entering
the market. When competitors seem to
be encroaching on a market, an attempt
is made to lure them away by means of
penetration pricing, which yields lower
margins.
If there are doubts about the shape of the
demand curve for a given product and the
initial price is found to be too high, the
price may be lowered. However, due to
human nature, it is very difficult to start
at a lower price and then raise it in future.
Raising a low price may annoy potential
customers, and anticipated drops in price
may retard demand at a particular price.
Penetration pricing, on the other hand,
is the strategy of entering the market
with a low initial price so that a greater
share of the market can be captured. The
penetration strategy is used when an elite
market does not exist and demand seems
to be elastic over the entire demand curve,
even during the early stages of product
introduction.
High price elasticity of demand is
Pricing Strategies for
Established Products
The preceding section largely focused
on pricing for new products. So, how
should you handle pricing for established
products? Changes in the marketing
environment may require a review of
the prices of products already on the
market. A review of pricing strategy may
also become necessary because of shifts
in demand. An examination of existing
prices may lead to one of three strategic
alternatives: maintaining the price,
reducing the price, or increasing the price.
The strategy of maintaining price is
appropriate in circumstances where
a price change may be desirable, but
the magnitude of change is not easy to
determine. If the reaction of customers
and competitors to a price change