A skimming pricing policy involves setting prices of products relatively high compared
to those of similar products and then gradually lowering prices. The skimming price is
the highest price possible that buyers who most desire the product will pay (skim the
cream off the top -- skim the innovators). This market segment is more interested in
quality, status, uniqueness, etc. This policy is effective in situations where a firm has a
substantial lead over competition with a new product. The product’s quality and image
must support its higher price, and enough buyers must want the product at that price. The
costs of producing a smaller volume cannot be so high that they cancel the advantage of
charging more, and competitors should not be able to enter the market easily and
undercut the high price. Skimming generates an initial cash flow to cover high research
and development (R&D) costs. Consumer demand must be inelastic.
A penetration pricing policy involves setting prices of products relatively low compared
to those of similar products in the hope that they will secure wide market acceptance that
will allow the company to later raise its prices. Such a policy is often used when the firm
expects competition from similar products within a short time and when large-scale
production and marketing will produce substantial reductions in overall costs. The low
price must help keep out the competition, and the company must maintain its low price
position. The market must be highly price sensitive. Production and distribution costs
must fall as sales volume increases. Penetration is appropriate when demand is elastic.
For example, Sears used penetration pricing to enter the crowded credit card field with
the Discover card. The retailer obtained as many customers as possible through a low
price (no membership fee), and established a position in the market.
Product-mix Strategies
Product-mix strategies include product line pricing, optional-product pricing, captiveproduct pricing, by-product pricing, and product bundle pricing. Product line pricing is
setting the price steps between various products in a product line based on cost
differences between the products, customer evaluations of different features, and
competitor’s prices. The price steps should take into account cost differences between
the products in the line, customer evaluations of their different features, and competitor’s
prices. Optional-product pricing is the pricing of optional or accessory products along
with a main product. An example would be when an automobile company sells the car
for a low sticker price but then includes more expensive (and profitable) options or
services. Captive-product pricing is setting a price for products that must be used along
with a main product, such as blades for a razor and film for a camera. In the case of
services, this strategy is called two-part pricing where there is a fixed fee and a variable
usage rate. By-product pricing is setting a price for by-products in order to make the
main product’s price more competitive. In this case, the manufacturer will seek a market
for these by-products and should accept any price that covers more than the cost of
storing and delivering them. Product bundle pricing is combining several products and
offering the bundle at a reduced price. This form of pricing is popular with theaters and
sports teams where season tickets are sold at less than the cost of single tickets.
By-Product Pricing
A pricing method used in situations where a saleable by-product results in the
manufacturing process. If the by-product has little value, and is costly to dispose
of, it will probably not affect the pricing of the main product; if, on the other
hand, the by-product has significant value, the manufacturer may derive a
competitive advantage by charging a lower price for its main product.