March 2nd, 2010 by Joern Meissner
There are three basic pricing strategies: skimming, neutral, and penetration. These pricing strategies represent the three ways in which a pricing manager or executive could look at pricing. Knowing these strategies and teaching them to your sales staff, and letting them know which one they should be using, allows for a unity within the company and a defined, company-wide pricing policy.
- Skimming Strategy
Skimming is the process of setting high prices based on value. Instead of basing your prices on your competition, a skimming price comes from within the company and the (financial) value your product represents to your customer. This strategy can be employed in emerging markets, where certain customers will always want the newest, most advanced product available. It also works well in a mature market, where customers have already realized the value of your product and are willing to pay for what they see as a worthwhile investment. Surprisingly, skimming also works in declining markets, as your diehard customers are willing to pay big bucks for what they see as an older but superior product with a dwindling supply.
- Neutral Strategy
In a neutral strategy, the prices are set by the general market, with your prices just at your competitors’ prices. The major benefit of a neutral pricing strategy is that it works in all four periods in the lifecycle. The major drawback is that your company is not maximizing its profits by basing price only on the market. Since the strategy is based on the market and not on your product, your company, or the value of either, you’re also not going to gain market share. Essentially, neutral pricing is the safe way to the play the pricing game.
- Penetration Strategy
A penetration strategy is the price war; this strategy goes for the deepest price cuts, driving at every moment to have your price be the lowest on the market. Penetration strategies only work in one of the four lifecycle periods: growth. During growth, your sales are continuing to expand, as your customers want the newest product but still a product that has already tested by others in the emerging period. This is when your average customer buys a product and when the sales numbers will be the biggest. A penetration strategy works here, and only here, because you’re attracting customers to a new but proven product with cheap productions. You’re developing relationships with new customers willing to try the new product but who will only come for a lower price.
Penetration strategies fail in the other lifecycle periods by leaving possible profits in the hands of the customers. In an emerging market, your product is brand new and customers who want it first should (and will) pay for that right. In a mature market, a price war will simply start the process of endless and useless competition, destroying your profit margin. In a declining market, only those who still must have your product will purchase it, and just like in an emerging period, they should (and will) pay for that right.
Knowing which pricing strategy works best for your company is an essential tool for any pricing manager and can only be found by recognizing the lifecycle of your products. If your entire sales force is on the same page in recognizing product lifecycles and utilizing pricing strategies, your company will likely see greater returns.
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Posted in Pricing
Tags: Competition, Customer Retention, Lifecycle, Neutral Pricing, Neutral Pricing Strategy, Penetration, Penetration Pricing, Penetration Pricing Strategy, Penetration Strategy, Pricing, Pricing Strategy, Product Lifecycle, Skimming, Skimming Pricing, Skimming Pricing Strategy, Skimming Strategy, Strategy, Success
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FAQs
What are the 4 major pricing strategies? Value-based, competition-based, cost-plus, and dynamic pricing are all models that are used frequently, depending on the industry and business model in question.
When to use skimming pricing strategy? ›
Price skimming is often used when a new type of product enters the market. The goal is to gather as much revenue as possible while consumer demand is high and competition has not entered the market.
What are the three basic pricing strategies? ›
Value based pricing - Price based on it's perceived worth. Competitor based pricing - Price based on competitors pricing. Cost plus pricing - Price based on cost of goods or services plus a markup.
What is skimming pricing strategy with an example? ›
Price skimming examples
Electronic products – take the Apple iPhone, for example – often utilize a price skimming strategy during the initial launch period. Then, after competitors launch rival products, i.e., the Samsung Galaxy, the price of the product drops so that the product retains a competitive advantage.
What are 4 types of strategies for product line pricing explain with examples? ›
There are four main product line pricing strategies: Bundle pricing involves packaging several items as one and selling them at a single price. For example, a hotel service includes accommodation, pick-up at the airport, and free breakfast. Leader pricing puts products at a discount to attract people to the store.
When would you use skimming? ›
Skimming is one of the tools you can use to read more in less time. Skimming refers to looking only for the general or main ideas, and works best with non-fiction (or factual) material. With skimming, your overall understanding is reduced because you don't read everything.
What is an example of skimming? ›
Skimming means reading something quickly without going into great detail in order to get a sense of what the work is all about. For example, a reader may use the skimming technique to quickly preview a book or scan an article for the main points to determine whether it is worth reading.
What is a competitive pricing strategy? ›
A competitive pricing strategy is a price-setting that is based on your competitors' prices. This pricing method focuses solely on the prices of your competitors that are public, but it does not take into account how much customers value the product or production costs.
What is the simplest pricing strategy? ›
The most important thing to ensure is that you're charging customers more than what you're paying to produce a product. What is the simplest pricing strategy? Cost-plus pricing is a simple pricing strategy that involves calculating the cost it takes to make your product and adding a flat percentage on top of that.
What are the 3 C's of pricing strategy? ›
The 3 C's of Pricing Strategy
Setting prices for your brand depends on three factors: your cost to offer the product to consumers, competitors' products and pricing, and the perceived value that consumers place on your brand and product vis-a-vis the cost.
Three important factors are whether the buyers perceive the product offers value, how many buyers there are, and how sensitive they are to changes in price.
Is price war illegal? ›
A naked agreement among competitors to fix prices is almost always illegal, whether prices are specified at a minimum, maximum, or within some range.
Why use price skimming? ›
Advantages of price skimming
Early adopters offer organic word-of-mouth advertising for your new product. Price skimming provides higher up-front sales figures to cover research and development costs. You'll potentially see higher returns on your investment by maintaining interest for longer.
What companies use skimming pricing? ›
What brands use a price skimming strategy? Price skimming is a common strategy among tech giants like Apple, Sony Playstation, Samsung, etc. It is also utilized by apparel brands like Nike, Adidas, and others who want to leverage high consumer demand for new products they release.
What are the 4 approaches to pricing? ›
There are 4 Pricing Methods that can help you put a price on what you sell: replacement cost, market comparison, discounted cash flow/net present value, and value comparison.
What are the 4 four strategy elements in marketing? ›
The four Ps or marketing are a “marketing mix” comprised of four key elements—product, price, place, and promotion.
What are the 4 major elements of a product strategy? ›
The 4 elements of product strategy include:
- Understanding the overall market.
- Defining the ideal customer profile.
- Setting a product vision and establishing a product roadmap.
- Continually analyzing customer feedback to adjust the roadmap to meet customer and market needs.
4 key strategy types
- Business strategy. A business strategy typically defines how a company intends to compete in the market. ...
- Operational strategy. Operational strategies focus on a company's employees and management team. ...
- Transformational strategy. ...
- Functional strategy.
March 2nd, 2010 by 
Joern Meissner 
