skimming and penetration pricing strategies

Skimming results in a slower rate of product diffusion and adoption.

Price skimming can attract more competition to the market due to firms intrigued by the high price margins and introducing their own product, also eroding the inelasticity of the demand curve.

It may be necessary to give retailers higher margins to convince them to handle the product enthusiastically. This could cause problems for the manufacturer's distribution chain. The inventory turn rate can be very low for skimmed products.If using a skimming strategy, a marketer must speak and think in terms of product characteristics to stay on the right side of the law. Marketers see this legal distinction as quaint since in almost all cases market characteristics correlate highly with product characteristics. Price discrimination uses market characteristics (such as price elasticity) to adjust prices, whereas yield management uses product characteristics. Price skimming can be considered either a form of price discrimination or a form of yield management. Price discrimination is illegal in many jurisdictions, but yield management is not. A price skimmer must be careful with the law.Dominant market share will typically be obtained by a low cost producer that pursues a penetration strategy. Price changes by any one firm will be matched by other firms resulting in a rapid growth in industry volume. Penetration pricing is a more suitable strategy in this case. If the long run demand curve is elastic (as in the adjacent diagram), market equilibrium will be achieved by quantity changes rather than price changes. It is effective only when the firm is facing an inelastic demand curve.There are several potential problems with this strategy. Over the release of competitor consoles (Xbox 360, Wii) and the release of next generation consoles (Sony Playstation 4 in 2013 and Sony Playstation 5 in 2020) the Playstation 3 price was gradually reduced and can now be purchased for under $200. Sony's console, the Sony Playstation 3, initially launched in 2006 for $599 in the United States.There are many real world examples of price skimming, especially in the technology market.

Therefore, the skimming strategy gets its name from skimming successive layers of 'cream,' or customer segments, as prices are lowered over time. Price skimming happens when a marketer initially offers an item at a high price that consumers with the strongest desire and funds to purchase it will, and then as that demand is depleted the price gets lowered to the next layer of customer desire in the market.The objective of a price skimming strategy is to capture the consumer surplus early in the product life cycle in order to exploit a monopolistic position or the low price sensitivity of innovators. Price skimming is sometimes referred to as riding down the demand curve. It has become a relatively common practice for managers in new and growing market, introducing prices high and dropping them over time. By following this price skimming method and capturing the extra profit a firm is able to recoup its sunk costs quicker as well as profit off of a higher price in the market before new competition enters and lowers the market price. Price skimming is a price setting strategy that a firm can employ when launching a product or service for the first time. JSTOR ( November 2019) ( Learn how and when to remove this template message).Unsourced material may be challenged and removed. Please help improve this article by adding citations to reliable sources. This article needs additional citations for verification.

Skimming and penetration pricing strategies