Penetration pricing and price skimming are two broad marketing strategies generally executed when companies release new products or services. For businesses, both approaches have functioned, but it is imperative to understand how a product/service price is related to its overall promotions and marketing strategies.
Penetration pricing relies on a low upfront price to attract customers. At the same time, price skimming is when high upfront prices are used to capitalize on short-term profits from the most interested and willing customers.
Skimming marketing strategies are extremely effective for technological products, where the demand is not consistent, and customers are lower price-sensitive and ready to pay higher prices. However, for several companies, penetration marketing strategies are the favored approach to draw and retain customers.
Businesses That Have Adopted Penetration Pricing Marketing Strategies
The purpose of a price penetration strategy is to tempt customers to try a new product and expand market share with the hope of retaining new customers once prices rise to normal levels. Examples of penetration pricing consist of an online news website offering one month free for a subscription-based service, or a bank offering a free checking account for six months.
It is common to see internet and cable providers offer free streaming services or extra channels to entice new subscribers. Food and beverage manufacturers occasionally introduce new products and flavors at low prices so customers could try them. Some mobile phone carriers offer customers inexpensive or free smartphones in return for a long-term contract.
Technology firms producing the phones utilize this strategy. Android phones are frequently priced low so customers build brand loyalty. Thus, Android achieves greater market penetration.
A few years ago, watching a movie at weekends was a tradition. In the US, people usually had to rent a movie at a video store. Netflix altered this tradition and convinced consumers to wait only for a day or two to get their films. In addition, Netflix proposed subscription charges of $1, where many video stores were charging up to $5. This introductory pricing strategy was highly effective, that it damaged traditional video and entertainment providers such as Blockbuster.
As a result, Netflix not only skirted out many competitors but offered the viewers a whole new watching experience.
Samsung is continually involved in producing Android smartphones and set the prices low to capture market share and grow brand loyalty. In addition to this, Samsung has also allied with other mobile companies to offer Android-based phones at meager prices in exchange for commitments towards longer-term contracts. As a result, consumers fall in love with low-priced phones and the contract cost eludes them.
Businesses That Have Adopted Price Skimming Strategy
Good examples of price skimming include cutting-edge electronic products, such as the Apple iPhone and Sony PlayStation 3. For example, the PlayStation 3 was initially sold at $599 in the American market, but it has been eventually lowered to below $200.
Electronic products like smartphones are good examples of price skimming strategy. Suppose a brand like Apple, Sony, LG, Huawei, Oppo, or Vivo, etc., launches a new mobile phone model. Then the price of it is exorbitant; the company follows price skimming at this stage of the product life cycle.
When other companies start offering the same product with newly added features; or the company launches a new model, the previous prices gradually decline. Sometimes the company even stops manufacturing the last model after launching the latest models.
Apple has always followed the price skimming strategy when it comes to the lineup of its smartphone, i.e., the iPhone. Apple announces new iPhone models every year, and the prices of the newer iPhones are pretty high. They are much higher compared to the rest of the competition in the smartphone market.
Apple can do this because there are potential takers for the newest tech and doing so will not tarnish its brand image. In fact, price skimming helps establish themselves as more of a luxury brand. However, the preceding year’s iPhone models receive a price cut as they are no longer deemed as cutting-edge pieces of tech.
While Sony is renowned for its TVs and smartphones, they follow a price skimming strategy on their gaming console lineup. For example, let us consider Sony’s PlayStation 3 console. It was initially launched at $599 since it had no competition and was considered to sell well as the previous model, the PlayStation 2, was a massive hit.
But since the PS2 was conservatively priced, the company knew that there were many potential purchasers for the PS3, and therefore set a greater initial launch price. The price of the PS3 was then reduced every passing year and ultimately reached $299 during the year it was discontinued.