Principles of Marketing II (MKT-321)

In-course exam script

Submitted To
MD. Masudur Rahman
Professor
Department of Marketing
University of Dhaka

Submitted By
Name Section ID Batch
MD. Zamilur Rahman Shuvo B 220 24th

Date of Submission
11th January, 2021

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Market Skimming Strategy:

Price skimming, also known as skim pricing, is a pricing strategy that implies a firm’s decision to
charge a high price initially and then gradually lower the price to attract more price-sensitive
customers.
The pricing strategy is usually used by a first mover who
face little to no competition. In terms of longevity, price
skimming is not a viable strategy, as competitors eventually
launch rival products and put pricing pressure on the first
mover.
Notable examples of price skimming include innovative
electronic products, such as the Apple iPhone and Sony
PlayStation console series. For instance, the Playstation 3
was originally sold at $599 in the US market, but it has been
gradually reduced to below $200.
There are two schools of thought here depending on the context that has been provided here thus
far.
1. If competitors are expected to introduce their own brands quickly, it may be safe to price
rather high.
2. 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.

Market Penetration Strategy:

Penetration pricing is a marketing strategy used by businesses to attract customers to a new product
or service by offering a lower price during its initial offering.
The lower price helps a new product or service penetrate the market
and sway customers from competitors. Market penetration pricing relies
on the strategy of using low prices initially to make a wide number of
customers aware of a new product.
The goal of a price penetration strategy is to entice customers to try a
new product and build market share with the hope of keeping the new
customers once prices rise back to normal levels. Penetration pricing
examples include Spotify offering a free trial for the first month or a
bank offering a free checking account for six months.

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The overarching goal of this pricing strategy is to:

✓ Capture market share

✓ Create brand loyalty
✓ Lure customers from other competitors
✓ Generate significant demand, looking to utilize the economics of scale.
✓ Drive competitors out of the market
Why would a marketer of innovative high-tech products choose market-skimming pricing rather
than market-penetration pricing when launching a new product?

Rationale:

The 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 is skimming pricing and penetration pricing.
In the context of marketing a top-tier tech product, price skimming is usually implemented 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 with heavy 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.

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  Many companies inventing new products set high initial prices in order to skim revenues
layer by layer from the market. An example for a company using this new product pricing
strategy is Apple. When it introduced the first iPhone, its initial price was rather high for
a phone. The phones were, consequently, only purchased by customers who really wanted
the new gadget and could afford to pay a high price for it. After this segment had been
skimmed for six months, Apple dropped the price considerably to attract new buyers.
Within a year, prices were dropped again. This way, the company skimmed off the
maximum amount of revenue from the various segments of the market.
 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.
 Innovative high-tech products usually face little or no competition in the market and they
usually have a high extent of acceptability from the consumers. That is why, pricing it
highly at the introduction will not affect the purchasing of the products.
On the flipside, Market-penetration pricing will not work as a pricing strategy for innovative
product manufacturers. Here’s why:

 For this pricing strategy to work, the market must be highly price sensitive so that a low
price generates more market growth and attracts a large number of buyers. This is highly
unlikely to happen.
 Also, production and distribution costs must decrease as sales volume increases. In other
words, economies of scale must be possible.
Neither of these conditions can be met when it’s for an innovative high-end tech product.
Innovation will require heavy investment for product development. And when it comes to
launching a new innovative product, to fully convince the customers of the product’s legitimacy,
prices need to be set at a reasonably high scale.

Verdict:

Assessing the reasoning provided thus far, we can safely say that “A marketer of an innovative
high-tech product should opt for Market Pricing Skimming instead of Market-penetration
Pricing.”

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