Difference between Penetration Pricing and Skimming Pricing

Penetration Pricing and Skimming Pricing are two distinct pricing strategies used by businesses to introduce new products or services to the market. Penetration Pricing involves setting a relatively low initial price for a new product or service to quickly gain a large market share. Skimming Pricing, on the other hand, involves setting a high price for a new product or service initially and then gradually lowering it over time.

What is Penetration Pricing?

The pricing technique in which prices of products are low to bring in new customers and improve the product’s market share is known as penetration pricing. With this strategy, businesses can easily enter the market and develop a loyal customer base. For instance, A bank provides a free checking account for a period of two months or an online platform such as Amazon Prime Video provides a free trial of a subscription for one month.

Characteristics of Market Penetration Strategy:

• Low Initial Price: Under this strategy, the product or service is priced significantly less than that of its competitors when it is first introduced to the market. This helps to attract customers and motivate them to test out the products.
• Obtaining Market Share: The main objective of this pricing is to gain a market share significantly and quickly. The company intends to become one of the biggest players in the marketplace and draw customers away from competitors by offering lower pricing.
• Gradual Price Increases: To increase profitability, a business may gradually increase price after gaining a significant share of the market and establishing the product. This should be done carefully to prevent offending customers who are using cheaper-priced products.
• Price Flexibility: For the purpose of encouraging consumers to buy the products, market penetration pricing may use flexible price techniques such as temporary discounts, sales promotions, or bundled packages.
• Creation of Entry Barriers: A business that uses market penetration pricing can create hurdles for prospective competitors to enter the market. It is challenging for new competitors to properly compete with the company because of its quick capture of market share through low prices.

What is Skimming Pricing?

The pricing technique in which prices of products are high to target customers who are already interested in their products is known as skimming pricing. This strategy aims to maximise short-term profits by introducing the product with high pricing. Initially, they are more profitable even though the company makes less sale. After a while, to draw in more customers, the price is gradually lowered over time. This method is applied to new products that have a high degree of customer acceptability and little to no competition in the market.

Characteristics of Market Skimming Strategy:

• High Starting Price: In comparison to other competitors, the product is first offered at a comparatively high price. This enables the business to profit from early adopters and customers who are willing to pay more money for the perceived value or distinctive features of the product.
• Targeting Higher Segments: Market Skimming usually focuses on consumer groups that are prepared to pay a premium for perceived quality, exclusivity, or innovation. These groups generally consist of enthusiasts, early adopters, and people who have more spending cash.
• Quality Sign: A high starting price can attract customers who see value in price and are prepared to pay more for something they believe to be better. It may also serve as a quality sign or innovation.
• Mitigation of Risk: Companies can reduce the risk involved in new product launches by setting a high initial price, especially for high-tech or innovative products that require significant development costs.
• Gradual Price Reductions: The business gradually decreases the price to appeal to more price-conscious market groups as the product matures or as competition increases. These price reductions might take place in response to competition pressures and market demand.

Difference between Penetration Pricing and Skimming Pricing

Basis	Penetration Pricing	Skimming Pricing
Meaning	Under the penetration pricing strategy, the company sets the low prices of products to bring in new customers and improve the product’s market share.	Under the skimming pricing strategy, the company sets high prices to target customers who are already interested in their products.
Provides	It provides a simple and easy way for businesses to enter the market.	It provides a way for businesses to increase their market share.
Profit margins	Penetration Pricing results in low-profit margins.	Price Skimming has an immediate effect on high profit margins.
Sales Volume	Due to its low prices, penetration pricing can lead to large sales volume.	Due to its high prices, skimming pricing can lead to lower sales volume.
Target Audience	The target audience for penetration pricing is the general public; i.e., mass market.	The target audience for skimming pricing is early adopters; i.e., niche market.
Demand for Product	When there is an elastic demand for a product, the company can use penetration pricing strategy.	When there is an inelastic demand for a product, the company can use skimming pricing strategy.
Brand Image	The customers perceive the brand as accessible and can reach the masses.	The customers perceive the brand as elite which can reach the high-end customers.
Price Adjustment	The company increases its product price as its market share increases.	The company gradually decreases its product price.
Duration	It is a long term or sustainable pricing strategy.	It is a short-term strategy that can be used until market saturation.

Penetration Pricing and Skimming Pricing – FAQs

Which product types use penetration pricing for best results?

Highly elastic items, such as internet, cable, banking services, groceries, airline tickets, or hospitality services, are usually able to succeed with penetration pricing since small price adjustments can more easily adjust demand.

Can penetration pricing and skimming pricing be used together?

Yes, penetration pricing and skimming pricing can be used together as part of a broader pricing strategy. A company may start with skimming pricing to maximize profits from early adopters and then switch to penetration pricing to attract a larger customer base over time.

What factors should be considered when choosing between penetration pricing and skimming pricing?

Factors such as market competition, target customer segments, product differentiation, and pricing objectives should be carefully evaluated when deciding between penetration pricing and skimming pricing. Additionally, considerations about production costs, market demand, and long-term profitability should also be taken into account.

When is penetration pricing used?

Penetration Pricing is typically used in competitive markets or when a company wants to rapidly capture market share. It aims to attract price-sensitive customers and encourage them to try the product or service.

When is skimming pricing used?

Skimming Pricing is often used when a company introduces a new product or service with unique features or benefits that differentiate it from competitors. It targets customers who are less price-sensitive and willing to pay a premium for the product or service.