Market penetration pricing & market skimming pricing

Market penetration is a pricing strategy in which businesses lower their product/service price to enter/penetrate the market. This strategy is usually adopted to enter a new market or tackle competition.

Adopting this strategy can reduce profitability, but lower prices are expected to increase market share. Further, the business may need to compromise on per-unit profit, but overall profit is stabilized due to the expected increase in sales volume.

Skimming price is the opposite of penetration pricing, where customers charge a higher price. It is suitable in limited situations where the product is unique, the business is a brand, competition is low, or the business has higher bargaining power.

When opting for this mode of pricing, per-unit price and profit are expected to increase. However, because of the higher price resulting in lower product demand, overall profit may not see significant incline.  

Circumstances when penetration pricing is the best strategy.

In the following circumstances, penetration pricing is considered a suitable pricing strategy.

• The business seeks to enhance its market share.
• The business needs to market their new product.
• The lower price is expected to increase sales.
• The product supply is not limited, and increased demand can be easily met.

Circumstances when skimming pricing is the best strategy.

In the following circumstances, skimming pricing is considered a suitable pricing strategy.

• There is little or no competition in the market.
• The bargaining power of the business is higher.
• Higher pricing does not impact on the customers.
• The customer’s purchasing power is higher, or the customer is not price sensitive.
• The product supplies may be limited.
• Seasonal product demand.
• Barriers to entry in the market are higher.

Conclusion

Market penetration pricing strategy means the business needs to lower its product price to enter the market. It’s considered the best way to enhance market share and revenue. This pricing strategy is suitable when a business needs to enter a new market, gain market share, or drive clearance sales.

Skimming pricing means the business charges a higher price for its products/services. This mode of pricing increases the per-unit profit. However, the higher product price may not impact overall profit, as sales volume may decrease due to the higher product price. This pricing strategy is considered suitable when there is low or no competition, the bargaining power of the business is higher, there are higher barriers to entry in the market, and the higher price does not impact the buyer.