New-Product Pricing Strategies

Pricing strategies typically change since the product passes through its life cycle. The introductory stage is especially modifying. Companies bringing out new product face the challenge of setting prices for the primary time. They can select between two broad strategies: market- penetration pricing and market-skimming pricing.

a)  Market-Skimming Pricing

Various companies that invent new products primary set high prices to "skim" revenues layer by layer from the market. Intel is a main user of this type of strategy, called market-skimming pricing. Market skimming makes sense just under sure conditions. Primary, the product's quality and image has to support its higher price, and sufficient buyers have to want the product at that price. Second, the expenses of producing a smaller volume cannot be so high that they cancel the advantage of charging more. At last, competitors should not be able to enter the market simply and undercut the higher price.

b)  Market-Penetration Pricing

Instead than setting a high initial price to skim off small but profitable market segments, some of the companies use market-penetration pricing. They set a low initial price to penetrate the market rapidly and deeply-to attract a high number of buyers quickly and win a large market share. The high sales volume results in falling costs, permitting the company to cut its price even further. Several conditions have to be met for this low-price strategy to work. First, the market has to be highly price sensitive so that a low price produces more market growth. Secondly, production and distribution costs have to fall as sales volume increases. At last, the low price must help in keep out the competition, and the penetration price has to maintain its low-price position-or else, the price advantage can be only temporary.