136 - Unit 2: Plan: Strategies

Pricing Strategies

There is no limit to the number of variations in pricing strategies and tactics. This wide variety of options is exactly what allows small business owners to be so creative. Pricing always plays a critical role in a firm’s overall strategy: pricing policies must be compatible with a company’s total marketing plan.

Introducing a New Product

Most small business owners approach setting the price of a new product with a great deal of apprehension because they have no precedent on which to base their decision. If the new product’s price is excessively high, it is in danger of failing because of low sales volume. However, if it is priced too low, the product’s sales revenue might not cover costs. When pricing any new product, the owner should try to satisfy these objectives:

1. Getting the product accepted. No matter how unusual a product is, its price must be acceptable to the firm’s potential customers.

2. Maintaining market share as competition grows. If a new product is successful, competitors will enter the market, and the small company must work to expand or at least maintain its market share. Continuously reappraising the product’s price in conjunction with special advertising and promotion techniques helps to retain a satisfactory market share.

3. Earning a profit. Obviously, a small firm must establish a price for the new product higher than its cost. Entrepreneurs should not introduce a new product at a price below cost because it is much easier to lower a price than to increase it once the product is on the market.

Small business owners have three basic strategies to choose from when establishing a new product’s price: a penetration pricing strategy, a skimming pricing strategy, and a sliding –down the demand curve strategy.

Market penetration. If a business introduces a product into a highly competitive market in which a large number of similar products are competing for acceptance, the product must penetrate the market to be successful. To gain quick acceptance and extensive in the mass market, the firm should introduce the product with a low price. In other words, it should set the price just above total unit cost to develop a wedge in the market and quickly achieve a high volume of 136 - Unit 2: Marketing Plan: Pricing Strategies sales. The resulting low profit margins may discourage other competitors from entering the market with similar products.

In most cases, a penetration strategy is used to introduce relatively low-priced goods into a market with no elite segment and little opportunity for differentiation exists. The introduction is usually accompanied by heavy advertising and promotional techniques, special sales, and discounts. Entrepreneurs must recognize that penetration pricing is a long range strategy; until consumers accept the product, profits are likely to be small. If the strategy works and the product achieves mass market penetration, sales volume will increase, and the company will earn adequate profits. The objectives of the penetration strategy are to beak into the market quickly, to generate high sales volume as soon as possible, and to build market share. Many consumer products, such as soap, shampoo, and lightbulbs, are introduced through penetration pricing strategies.

Skimming. A skimming pricing strategy often is used when a company introduces a new product into market with little or no competition. Sometimes the firm employs this tactic when introducing a product into a competitive market that contains an elite group that is able to pay a higher price. Here a firm uses a higher than normal price in an effort to quickly recover the initial developmental and promotional costs of the product. Start up costs usually are substantial due to intensive promotional expenses and high initial production costs. The idea is to set a price well above the total unit cost and to promote the product heavily in order to appeal to the segment of the market that is not sensitive to price. Such a pricing tactic often reinforces the unique, prestigious image of a store and projects a quality picture of the product. Another advantage of this technique is that the owner can correct pricing mistakes quickly and easily. If the business sets a price that is too low under a penetration strategy, raising the price can by very difficult. If a business using the skimming strategy sets a price too high to generate sufficient volume, it can always lower the price. Successful skimming strategies require a company to differentiate its products or services from those of the competition, justifying the above average price.

Sliding Down the Demand Curve. One variation of the skimming price strategy is called sliding down the demand curve. Using this tactic, the small company introduces a product at a high price. Then technological advancements enable the firms to lower its costs quickly and to reduce the product’s price before competition can. By beating other businesses in a price decline, the small company discourages competitors and gradually, over time, becomes a high volume producer. Computers are a prime example of a product introduced at a 136 - Unit 2: Marketing Plan: Pricing Strategies high price that quickly cascaded downward as companies forged important technological advances.

Sliding is a short term pricing strategy that assumes that competition will eventually emerge. But even if no competition arises, the small business almost always lowers the product’s price to attract a larger segment of the market. Yet, the initial high price contributes to a rapid return of start up costs and generates a pool of funds to finance expansion and technological advances.

Pricing Established Goods and Services

Each of the following pricing tactics or techniques can become part of the toolbox of pricing tactics entrepreneurs can use to set prices of established goods and services.

Odd Pricing. Although studies of consumer reaction to prices are mixed and generally inclusive, many small business managers use the technique known as odd pricing. These managers prefer to establish prices that end in odd numbers (5,7,9) because they believe that merchandise selling for $12.95 appears much cheaper than the same item priced at $13.00. Psychological techniques such as odd pricing are designed to appeal to certain customers interests, but their effectiveness remains to be proven.

Price Lining. Price lining is a technique that greatly simplifies the pricing function. Under this system, the manager stocks merchandise in several different price ranges, or price lines. Each category of merchandise contains items that are similar in appearance, quality, cost, performance, or other features. For example, most music stores use price lines for their DVDs and CDs to make it easier for customers to select items and to simplify stock planning. Most lined products appear in sets of three – good, better and best – at prices designed to satisfy different market segment needs and incomes.

Leader Pricing. Leader pricing is a technique in which the small retailer marks down the customary price of a popular item in an attempt to attract more customers. The company earns a much smaller profit on each unit because the markup is lower, but purchases of other merchandise by customers seeking the leader item often boost sales and profits. In other words, the incidental purchases that consumers make when shopping for the leader item boost sales revenue enough to offset a lower profit margin on the leader. Grocery stores often use leader pricing. 136 - Unit 2: Marketing Plan: Pricing Strategies

Geographical Pricing. Small businesses whose pricing decisions are greatly affected by the costs of shipping merchandise to customers across a wide range of geographical regions frequently employ one of the geographical pricing techniques. For these companies, freight expenses comprise a substantial portion of the cost of doing business and may cut deeply into already narrow profit margins. One type of geographical pricing is zone pricing, in which a small company sells its merchandise at different prices to customers located in different territories. For example, a manufacturer might sell at one price to customers east of the Mississippi and at another to those west of the Mississippi. The United States Postal Service’s varying parcel post charges offer a good example of zone pricing. A small business must be able to show a legitimate basis for the price discrimination or risk violating Section 2 of the Clayton Act.

Another variation of geographic pricing is uniform delivered pricing, a technique in which a firm charges all of its customers the same price regardless of their location, even though the cost of selling or transporting the merchandise varies. The firm calculates the proper freight charges for each region and combines them into a uniform fee. The result is local customers subsidize the firm’s charges for shipping merchandise to distant customers.

Opportunistic Pricing. When products or services are in short supply, customers are willing to pay more for products they need. Some businesses use such circumstances to maximize short-term profits by engaging in price gauging. Many customers have little choice but to pay the higher prices. Opportunistic pricing may backfire, however, because customers know that unreasonably high prices mean the company is exploiting them.

Discounts. Many small business owners use discounts or markdowns – reduction from normal list prices – to move stale, outdated, damaged, or slow-moving merchandise. A seasonal discount is a price reduction designed to encourage shoppers to purchase merchandise before an upcoming change of seasons. For instance, many retail clothiers offer special sales on winter coats in midsummer. Some firms grant purchase discounts to special groups of customers such as senior citizens or students, to establish a faithful clientele and to generate repeat business. For example, one small drugstore located near a state university offered a 10 percent student discount on all purchases and was quite successful in developing a large volume of student business. 136 - Unit 2: Marketing Plan: Pricing Strategies

Multiple unit pricing is a promotional technique that offers customers discounts if they purchase in quantity. Many products, especially those with relatively low unit volume, are sold using multiple unit pricing. For example, instead of selling an item for 50 cents, a small company might offer five for $2.00.

Suggested Retail Price. Many manufacturers print suggested retail prices on their products or include them on invoices or in wholesales catalogs. Small business owners frequently follow these suggested retail prices because this eliminates the need to make pricing decisions. Nonetheless, following prices established by a distant manufacturer may create problems for the small business. For example, a high end retailer may try to create a high-quality, exclusive image through a prestige pricing policy, but manufacturers may suggest discount outlet prices that are incompatible with the small firm’s image. Another danger of accepting the manufacture’s suggested price is that it does not take into consideration the small firm’s cost structure or competitive situation. A manufacturer cannot force a business to accept a suggested retail price or require a business to agree not to resell merchandise below a stated price because such practices violate the Sherman Antitrust Act and other legislation.

Pricing a new product is often difficult for the small business owner, but it should accomplish three objectives: getting the product accepted, maintaining market share as the competition grows, and earning a profit. Generally, there are three major pricing strategies used to introduce new products into the market: penetration, skimming, and sliding down the demand curve. Pricing techniques for existing products and services include odd pricing, price lining, leader pricing, opportunistic pricing, discounts, and suggested retail pricing. 136 - Unit 2: Marketing Plan: Pricing Strategies

Scarborough, N and Zimmerer, T (2005) Essentials of Entrepreneurship and Small Business Management Pearson Prentice Hall he pricing strategy for a new product should be developed so that the desired impact on the market is achieved while the emergence of competition is discouraged. Two basic strategies that may be used in pricing a new product are skimming pricing and penetration pricing.

Skimming Pricing Skimming pricing 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 heavy expenditure on promotion. A skimming strategy may be recommended when the nature of demand is uncertain, when a company has expended large sums of money on research and development 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 is low. Besides, in the absence of any close substitute, cross- elasticity is also low. These factors, along withheavy emphasis on promotion, tend to help the product make significant inroads into the market. The high price also helps segment the market. Only nonprice- conscious customers will buy a new product during its initial stage. Later on, the mass market can be tapped by lowering the price. 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, price may be slashed. However, it is very difficult to start low and then raise the price. Raising a low price may annoy potential customers, and anticipated drops in price may retard demand at a particular price. For a financially weak company, a skimming strategy may provide immediate relief. This model depends on selling enough units at the higher price to cover promotion and development costs. If price elasticity is higher than anticipated, a lower price will be more profitable and “relief giving.” Modern patented drugs provide a good 136 - Unit 2: Marketing Plan: Pricing Strategies example of skimming pricing. At the time of its introduction in 1978, Smithkline Beecham’s anti-ulcer drug, Tagamet, was priced as high as $10 per unit. By 1990, the price came down to less than $2; it was sold for about 60 cents in 1994. (Tagamet was to lose patent protection in the United States in 1995, unleashing a flood of cheaper generics onto the American market.)6 Many new products are priced following this policy. Videocassette recorders (VCRs), frozen foods, and instant coffee were all priced very high at the time of their initial appearance in the market. But different versions of these products are now available at prices ranging from very high to very low. No conclusive research has yet been done to indicate how high an initial price should be in relation to cost. As a rule of thumb, the final price to the consumer should be at least three or four times the factory door cost. The decision about how high a skimming price should be depends on two factors: (a) the probability of competitors entering the market and (b) price elasticity at the upper end of the demand curve. If competitors are expected to introduce their own quickly, it may be safe to price rather high.

On the other hand, if competitors are years behind in product development and a low rate of return to the firm would slow the pace of research at competing firms, a low skimming price can be useful. However, in the face of impending competition may not be wise if a larger market share makes entry more difficult. If limiting the sale of a new product to a few selected individuals produces sufficient sales, a very high price may be desirable. Determining the duration of time for keeping prices high depends entirely on the competition’s activities. In the absence of patent protection, skimming prices may be forced down as soon as competitors join the race. However, in the case of products that are protected through patents (e.g., drugs), the manufacturer slowly brings down the price as the patent period draws near an end; then, a year or so before the expiration of the patent period, the manufacturer saturates the market with a very low price. This strategy establishes a foothold for the manufacturer in the mass market before competitors enter it, thereby frustrating their expectations. So far, skimming prices have been discussed as high prices in the initial stage of a product’s life. Premium and umbrella prices are two other forms of price skimming. Some products carry premium prices (high prices) permanently and build an image of superiority for themselves. When a mass market cannot be developed and upper-end demand seems adequate, manufacturers will not risk tarnishing the prestigious image of their products by lowering prices, thereby offering the 136 - Unit 2: Marketing Plan: Pricing Strategies product to everybody. Estee Lauder cosmetics, Olga intimate apparel, Rolex watches, Waterford Crystal, Armani suits, and Hermes scarves are products that fall into this category. Sometimes, higher prices are maintained in order to provide an umbrella for small high-cost competitors. Umbrella prices have been aided by limitation laws that specify minimum prices for a variety of products, such as milk. Du Pont provides an interesting example of skimming pricing. The company tends to focus on high-margin specialty products. Initially, it prices its products high; it then gradually lowers price as the market builds and as competition grows. Polaroid also pursues a skimming pricing strategy. The company introduces an expensive model of a new camera and follows up the introduction with simpler lower-priced versions to attract new segments.

Penetration Pricing Penetration pricing 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 early stages of product introduction. High price elasticity of demand is probably the most important reason for adopting a penetration strategy. 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. A competitor’s costs play a decisive role in this pricing strategy because a cost advantage over the existing manufacturer might persuade another firm to enter the market, regardless of how low the margin of the former may be. One may also turn to a penetration strategy with a view to achieving economies of scale. Savings in production costs alone may not be an important factor in setting low prices because, in the absence of price elasticity, it is difficult to generate sufficient sales. Finally, before adopting penetration pricing, one must make sure that the product fits the lifestyles of the mass market. For example, although it might not be difficult for people to accept imitation milk, cereals made from petroleum products would probably have difficulty in becoming popular. How low the penetration price should be differs from case to case.

There are several different types of prices used in penetration strategies: restrained prices, elimination prices, promotional prices, and keep-out prices. Restraint is applied so that prices can be maintained at a certain point during inflationary periods. In this case, environmental circumstances serve as a guide to what the price level should be. Elimination prices are 136 - Unit 2: Marketing Plan: Pricing Strategies fixed at a point that threatens the survival of a competitor. A large, multiproduct company can lower prices to a level where a smaller competitor might be wiped out of the market. The pricing of suits at factory outlets illustrates promotional prices. Factory outlets constantly stress low prices for comparable department-store-quality suits. Keep-out prices are fixed at a level that prevents competitors from entering the market. Here the objective is to keep the market to oneself at the highest chargeable price. A low price acts as the sole selling point under penetration strategy, but the market should be broad enough to justify low prices. Thus, price elasticity of demand is probably the most important factor in determining how low prices can go. This point can be easily illustrated. Convinced that shoppers would willingly sacrifice convenience for price savings, an entrepreneur in 1981 introduced a concentrated cleaner called 4 +

1. Unlike such higher-priced cleaners as Windex, Fantastik, and Formula 409, this product did not come in a spray bottle. It also needed to be diluted with water before use. The entrepreneur hoped for 10 percent of the $200 million market. But the product did not sell well. The product was not as price elastic as the entrepreneur had assumed. Though the consumer tends to talk a lot about economy, the lure of convenience is apparently stronger than the desire to save a few cents. Ultimately, 4 + 1 had to be withdrawn from most markets. Unlike Du Pont, Dow Chemical Company stresses penetration pricing. It concentrates on lower-margin commodity products and low prices, builds a dominant market share, and holds on for the long haul. Texas Instruments also practices penetration pricing. Texas Instruments starts by building a large plant capacity. By setting the price as low as possible, it hopes to penetrate the market fast and gain a large market share. Penetration pricing reflects a long-term perspective in which short-term profits are sacrificed in order to establish sustainable competitive advantage. Penetration policy usually leads to above-average long-run returns that fall in a relatively narrow range. Price skimming, on the other hand, yields a wider range of lower average returns

CONCLUSION : 1. Despite the increased role of nonprice factors in modern marketing, price remains a criticalelement of the marketing mix. Price is the only element that 136 - Unit 2: Marketing Plan: Pricing Strategies produces revenue; the othersproduce costs.2. In setting pricing policy, a company follows a six-step procedure. It selects its pricingobjective. It estimates the demand curve, the probable quantities it will sell at each possibleprice. It estimates how its costs vary at different levels of output, at different levels of accumulated production experience, and for differentiated marketing offers. It examinescompetitors' costs, prices, and offers. It selects a pricing method. It selects the final price.3. Companies do not usually set a single price, but rather a pricing structure that reflectsvariations in geographical demand and costs, market-segment requirements, purchase timing,order levels, and other factors. Several price- adaptation strategies are available: (1) geographicalpricing; (2) price discounts and allowances; (3) promotional pricing; and (4) discriminatorypricing.4. After developing pricing strategies, firms often face situations in which they need to changeprices. A price decrease might be brought about by excess plant capacity, declining market share,a desire to dominate the market through lower costs, or economic recession. A price increasemight be brought about by cost inflation or overdemand. Companies must carefully managecustomer perceptions in raising prices.5. Companies must anticipate competitor price changes and prepare contingent response. Anumber of responses are possible in terms of maintaining or changing price or quality.6. The firm facing a competitor's price change must try to understand the competitor's intent andthe likely duration of the change. Strategy often depends on whether a firm is producinghomogeneous or nonhomogeneous products. Market leaders attacked by lower-pricedcompetitors can choose to maintain price, raise the perceived quality of their product, reduceprice, increase price and improve quality, or launch a low-priced fighter line. Thank You 136 - Unit 2: Marketing Plan: Pricing Strategies

. Difference and similarities between penetration pricing and predatory pricing? In: Business Accounting and Bookkeeping, Similarities Between [Edit categories] Answer: Similarity is that both tend to push the price levels `lower' Difference is in the `objective' or `orientation' or `thought' behind the pricing strategy Penetration Pricing is when the price is pegged at a rate that very price-sensitive segments find acceptable. e.g. Nokia 1100 when introduced in Indian markets. The objective is to open up newer market segments Predatory Pricing is when prices are set lower than average selling prices of industry and competitors. Objective is to put pressure on competitors and price them out of the market 136 - Unit 2: Marketing Plan: Pricing Strategies

PENETRATION PRICING

Penetration pricing is a strategy employed by businesses introducing new goods or services into the marketplace. With this policy, the initial price of the good or service is set relatively low in hopes of "penetrating" into the marketplace quickly and securing significant market share. "This pricing approach," wrote Ronald W. Hilton inManagerial Accounting, "often is used for products that are of good quality, but do not stand out as vastly better than competing products."

Writing in Basic Marketing, E. Jerome McCarthy and William Perreault Jr. observed that "a penetration pricing policy tries to sell the whole market at one low price. Such an approach might be wise when the 'elite' market—those willing to pay a high price—is small. This is the case when the whole demand curve [for the product] is fairly elastic. A penetration policy is even more attractive if selling larger quantities results in lower costs because of economies of scale. Penetration pricing may be wise if the firm expects strong competition very soon after introduction. A low penetration price may be called a 'stay out' price. It discourages competitors from entering the market." Once the product has secured a desired market share, its producers can then review business conditions and decide whether to gradually increase the price.

Penetration pricing, however, is not the same as introductory price dealing, in which marketers attach temporary low prices to new products when they first hit the market. "These temporary price cuts should not be confused with low penetration prices," wrote McCarthy and Perreault Jr. "The plan [with introductory price dealing] is to raise prices as soon as the introductory offer is over."

SKIMMING VERSUS PENETRATION

Some manufacturers of new products, however, take a decidedly different tack when introducing their goods to the marketplace. Some choose to engage in skimming pricing, a strategy wherein the initial price for the product is set quite high for a relatively short time after introduction. Even though sales will likely be modest with skimming, the profit margin is great. This pricing approach is most often used for high-prestige or 136 - Unit 2: Marketing Plan: Pricing Strategies otherwise unique products with significant cache. Once the product's appeal broadens, the price is then reduced to appeal to a greater range of consumers. "The decision between skimming and penetration pricing," said Hilton, "depends on the type of product and involves trade-offs of price versus volume. Skimming pricing results in much slower acceptance of a new product, but higher unit profits. Penetration pricing results in greater initial sales volume, but lower unit profits."

Disadvantages of Skimming Pricing

Price skimming is a marketing strategy used by many business owners. The pricing strategy is important in a business to survive in the industry. It can also help to obtain profit as long as you know how to manipulate the price skimming.

Employing pricing strategies is necessary in order to cope with the competition as well as the prevailing production costs. Apparently, a business owner should know how to deal with the prices offered by competitors. This means that when your competitor reduces the price of the product similar to yours then you should also reduce your price. In like manner, you should also cope up with the production costs. However, you should decide the price increase that you can afford in order to make your customers satisfied. There are two types of pricing strategy commonly used by business owners such as penetration and skimming.Either of the two pricing strategy has its own advantages and disadvantages

Price Skimming Price skimming is a pricing strategy that employs high price for a short period until such time that the price of the product eventually hits the market. Nevertheless, you should keep in mind that the success of this strategy depends on the inelasticity of demand. The good point about using price skimming is that you can have the opportunity to take pleasure with the high profits in just a short time. On the other hand, this price strategy has its advantages and disadvantages. One of the advantages of price skimming is increasing the price of the new launched product. In this way you get back the cost on developing as well as marketing the product. In like manner, price skimming is also effective in segmenting the product in the market. By using skimming the business owner can divide the market into segments as well as reduce the price into different segments in order to acquire maximum profits. Dealers also take advantage in price skimming in such a way that the high markups of the supplier are transferred to the dealers. Likewise, the good point about this pricing strategy is that you can get higher profits because most buyers are particular about prestige and not the price. That is why even if the product involves high mark ups it is still saleable. It is also advantageous in competing brands.

On the other hand, price skimming also has its disadvantages for some business owners who do not have the ability to cope up the high prices of the competitors. Obviously, not all business owners have the ability to deal with the price competition. Another disadvantage is that there are buyers associating the quality of the product with the price. That is why in order to avoid the disadvantage and at the same time enjoy the benefits of the price skimming; you should learn the possible ways on how to deal with it. 136 - Unit 2: Marketing Plan: Pricing Strategies

Effects of Penetration Pricing

Penetration pricing requires extensive planning, according to the book “The Future of Business: The Essentials,” by Lawrence J. Gitman and Carl McDaniel. To properly execute a penetration-pricing strategy, the sponge manufacturer first must gear up for mass production and then launch a sizable advertising campaign to publicize its new low-priced sponge. Both steps are expensive, so penetration-pricing strategies might not work well for small businesses. Also, if your company’s forecasts for consumer demand are off, you could end up with a large stockpile of unwanted products. Price Skimming

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. Effects of Price Skimming

Price skimming offers four major advantages, according to “The Future of Business: The Essentials.” It can offer insight into what consumers are willing to pay. It can create an aura of prestige around your product. If the initial price is too high, you can lower it easily. Finally, late adopters might be pleased to get your prestigiou

Penetration Pricing

Penetration pricing occurs when a company launches a low-priced product with the goal of securing market share. For example, a sponge manufacturer might use a penetration pricing strategy to lure customers from current competitors and to discourage new competitors from entering the industry. If the sponge’s price is low enough, consumers will flock to the new product. Competitors who can’t produce and promote sponges for such a small profit will avoid the market, freeing the sponge company to maximize recognition and goodwill 136 - Unit 2: Marketing Plan: Pricing Strategies

Case study Apple’s Pricing Policy Moves from Skim to Penetration

Apple used to be known for high priced, but elegant, hardware. That is no longer the case. This article provides a nice example of two concepts that you will cover when you get to Price. A skim price policy is offering high prices on products to a smaller market before moving later to more price sensitive customers. A penetration price policy tries to sell the whole market at one low price. In the old days Apple was a niche player known for high prices. Now it owns some markets (tablet computers, smartphones, portable music players) and benefits from economies of scale. The company offers even lower prices by keeping older products in its line and offering them for lower prices. It will be interesting to see how they respond to the new Kindle Fire. Read more at “Apple’s Lower Prices Are All Part of the Plan” (New York Times, October 23, 2011).

What do you think is Apple’s price policy? Do you think it is a good policy? Why or why not? 136 - Unit 2: Marketing Plan: Pricing Strategies

Responses to “Apple’s Pricing Policy Moves from Skim to Penetration”

I think Apple’s pricing policies are genius and their products are so popular it works very well. Consider the new iphone 4s, it sells for the typical $199 while the older 4 has dropped to $99 and AT&T is actually giving iphone 3′s away for free. Any one of these options is good for Apple because it gets the consumer into the Apple family and the person who takes the iphone 3 for free now may very likely pay the premium price for the iphone 5 when it comes out, better yet they are more likely to buy another apple product like an ipad or macbook.

think that Apple has done a great job with their pricing policy. They now have a very large customer base that insist on their product. Now that they have lowered their prices they are going to gain an even larger share of the technology marketacross the world. Now almost anyone can have an Apple product because they have become more affordable for the older models. However the extremely loyal Apple customers will continue to buy the newest product at the higher price because they are, “Apple People.” If you talk with any one that has an Apple product they say that they will never use anything else and are willing to pay more for the product that they see as better than the competitions. If Apple keeps their current pricing policy they will continue to be a major player in the technology world. I think Apple is picking a great time to go from skim to penetration pricing particularly with the iPhone because of the increased use of smart phones. At first smart phones were really popular with business people or technology people but as the features offered on the smart phones grows it is attracting a wider range of people. If people are just buying a smart phone for the first time they might be more inclined to go with an iPhone priced at $199 or free for later models rather than $300 for a Droid or $230 or an HTC. Their reduced prices can attract late adopters who may like them so much that they will insist on iPhones when they are able to upgrade in the future. Within the last month or so I have been looking into buying an iPad but as soon as Amazon released the Kindle Fire I decided to wait and see if that would have any impact on Apple’s price. It will be interesting to see what Apple does come November and the arrival of the Kindle Fire.

Apple has done some very interesting things in order to increase the size of their market. Starting with offering more competitive prices, Apple has allowed far more customers to be able to afford their products. Apple products have very distinct design features, even when other manufacturers attempt to imitate Apple products they have a hard time competiting with Apple’s prices. Apple has effectively established a customer base within the technology market and that market continues to grow. Apple has also done some very impressive things in creating loyal and repeat customers. This is rare to see in the technology market. Often times people who buy iPhones will also buy Apple laptops and even iPads. Another smart marketing strategy that Apple has used is buying up supplies needed to create their products and storing them. This allows Apple to get the supplies at a low cost while raising the cost for other competitors. This is seen with flash memory chips, Apple is currently the largest buyer. By offering more competitive prices, Apple has created a situation in which more customers can afford their prices. This allows apple to acquire these entry level customers and build loyalty. It is likely that Apple will continue to grow if they continue their current strategies. 136 - Unit 2: Marketing Plan: Pricing Strategies

Skim Pricing

In any market, there are a certain segment of buyers who are relatively price insensitive because they value the offering so highly. Think of early adopters in the technology industry who rush to purchase the latest and greatest gadgets, newest high-speed computers, printers, and audio equipment. Skim pricing is a conscious decision to sell to this segment at premium prices more commensurate with value, thereby earning more profit than could be made selling at a lower price to an albeit wider market. The company is not so much interested in market share as it is in extracting the perceived value from this smaller segment of the market. Penetration Pricing

Penetration pricing is when the company decides to set the price below the product’s value to the customer, thereby ensuring a larger customer base. It is the trade-off of higher revenue versus higher margins, and can be a very effective strategy especially for new entrants into particular markets. Penetration prices are not necessarily cheap, but they are low relative to perceived value. For instance, Lexus used a penetration pricing strategy to bring Mercedes, Audi, BMW, and Porsche to their knees when it launched its LS (luxury sedan) 400 in early 1989 at $35,000, 40 percent less than BMW, Mercedes, and the same as Cadillac. 136 - Unit 2: Marketing Plan: Pricing Strategies

Penetration Pricing Strategy: The pricing strategy of low price in the early stages of product introduction is called as “penetration pricing strategy’. Objective: The main objective is to capture a large share of the market in the early stages of product introduction in the market. Types: This strategy can be of two types: (a) Rapid Penetration Pricing Strategy - where low prices are charged, and the product is promoted with heavy promotional expenditure. (b) Slow Penetration Pricing Strategy – where low price is charged, and there is limited promotional expenditure to promote the product.