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Q3. NEW PRODUCT PRICING STRATEGIES - PENETRATION AND SKIMMING:  A CASE STUDY

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Q3. NEW PRODUCT PRICING STRATEGIES - PENETRATION AND SKIMMING:  A CASE STUDY

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APPLE VS. ANDROID

Android follows a penetration pricing strategy. Apple uses a skimming strategy. Neither is inherently superior to the other. Like any strategy, each has advantages and disadvantages and their ultimate success often depends upon both circumstances and execution.

Penetration

Penetration pricing occurs when a company launches a low-priced product with the goal of securing market share. For example, a sponge manufacturer might use a penetration pricing strategy to lure customers from current competitors and to discourage new competitors from entering the industry. If the sponge’s price is low enough, consumers will flock to the new product. Competitors who can’t produce and promote sponges for such a small profit will avoid the market, freeing the sponge company to maximize brand recognition and goodwill.

Skimming

Apple has added a twist to the skimming strategy. Rather than introducing their products at a high price and then lowering their prices later, Apple stakes out a price and then maintains and defends that price by significantly increasing the value of their products in future iterations.

For example, over the past six years, the average sales price of the iPhone has remained remarkably stable with the subsidized price remaining at ~$200 and the unsubsidized price hovering around $650.

Price skimming offers four major advantages…. It can offer insight into what consumers are willing to pay. It can create an aura of prestige around your product. If the initial price is too high, you can lower it easily. Finally, late adopters might be pleased to get your prestigious product at a bargain price, which creates goodwill for your company. A major disadvantage, however, is that large profits attract competitors, so this price strategy only works well for businesses that have a significant competitive advantage, such as proprietary technology.

NINTENDO VS. SONY

Market-Skimming Pricing

In 2006 Sony released the Playstation 3 (PS3). The price for the 60gb model was an astronomical $699 and the 20gb model was $499. Many prospective buyers were turned off by these prices because they were very high for a gaming console and the alternatives (Xbox 360 and Nintendo Wii) were much cheaper. The company issued price cuts when it introduced two models, the 80gb and 40gb, and phasing out the 60gb and 20gb. The 80gb model was priced at $499 and the 40gb was priced at $399. In 2009, Sony issued another price cut and eliminated the 40gb and 80gb models, replacing it with 120gb and 250gb models. The 120gb retailed for $299 while the $250 model retailed for $349.99. Sony also used this strategy for previous consoles, the Playstation 2 retailed for $299 at launch; Sony later cut the price to $199 and finally $99 today. The PS3 currently has the smallest share among its competition. Although this is a culmination of multiple factors, the initially high price might have turned off several prospective buyers who instead purchased cheaper alternatives such as the Nintendo Wii and Microsoft Xbox 360.
Market-Penetration Pricing

Nintendo adopted a market-penetration pricing strategy for its latest console, the Wii. The Wii was priced at $249.99 at launch, much cheaper than the 360 and PS3. This pricing strategy as well as its innovations are the main contributor to its success. It currently holds the largest market share among its competitors. Nintendo issued only one price cut so far, in 2009, lowering the price of the Wii to $199.

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Product mix pricing strategies:

Pricing is a rather significant element of the marketing mix and it is necessary for companies to make strategic choices in regards to the price of the products to fulfill the ultimate potential of the company (in terms of goals and profits). There are five types of product mix pricing strategies; as shown below.

1.Product Line Pricing

When there is a range of products or services the pricing reflects the benefits of the parts of the range. For example, car washes; a basic wash could be $2, a wash and wax would be $4 and the whole package for $6. Product line pricing seldom reflects the cost of making the product since it delivers a range of prices that a consumer perceives as being fair incrementally- over the range.

2.Optional- product pricing

It takes into account optional or accessory products along with the main product. For example, airlines will charge for optional extras such as guaranteeing a window seat or reserving a row of seats next to each other.

3. Captive-product pricing

Low prices are offered for the core product, but high prices are placed on captive products. The two products must be using at the same time. For example, video game consoles. Captive product pricing is used for consoles and their accessories with the console being the high-priced item and the captive products- the games, the extra controllers, the rechargeable battery packs, and other accessories- being the less-expensive but still necessary items. A console with no games is nearly worthless, and console companies use that to their advantage.

4. By-product pricing

By- product pricing is a pricing method used in situations where a sale able 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. For example,  in producing processed meats, chemicals, or oil there are often by-products, which – if they had to be disposed of – would make the main product uncompetitive. The producer therefore attempts to sell these by-products at the best possible price in order to keep the main product competitive.

5.Product bundle pricing

A marketing ploy in which several products are offered for sale in one combined unit that is often marked at a reduced price compared to the sum of their separate purchase prices. Computer software product, fast food meals and option packages on new cars are usually used by the product bundle pricing. It also called package deal pricing. For example, KFC involves putting multiple products together (coke, burger, french fries) to make a more attractive.

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Value-Based pricing

Value-based pricing is a method of pricing products in which companies first try to determine how much the products are worth to their customers. The goal is to avoid setting prices that are either too high for customers or lower than they would be willing to pay if they knew what kind of benefits they could get by using a product. Data mining software can play an important role in the process by helping users segment their customers and define the value they receive.

For example, one pharmaceutical maker priced a new antiulcer drug, but not by adding up the costs of developing and manufacturing the medication and tacking on the amount of profit it wanted to make. Instead, the company used value-based pricing techniques to justify a higher price than it might otherwise have been able to get from medical insurers

Competition-Based Pricing

The competition for market share between the two aerospace giants Boeing and Airbus in the mid- and late 1990s offers an example of this risk. At the time, Airbus was consistently gaining market share and had surpassed its self-determined "survival threshold" of 30% of new global commercial airplane orders. Boeing decided to respond. It would "beat back Airbus and retain supremacy in the commercial-jetliner industry,"3 and fearlessly guard its 60% market share. Boeing and Airbus began competing vigorously, "making every bid a battleground." Each would slash its price by at least 20% off the list price to grab an order. For example, to bid for ValueJet's order of 50 100-passenger airplanes in 1995, Boeing reportedly brought its price for Boeing 737s down from the list of $35 million, below its rock-bottom price of $22 million, all the way to $19 million.4 The outcome was quite predictable: huge losses all around. Boeing temporarily won the share battle for new airplane orders. However, the victory came at a horrendous cost. Boeing suffered its first annual loss in 50 years in 1997, and by the following year, the company was forced to take more than $3 billion of pretax charges for the foul-up. Between 1996 and 1998, the profit margin of Boeing's commercial jetliners fell from 10% to less than 1%—a lower margin than a corner grocery store.

Cost-Based pricing

Cost based pricing is one the method of determining the selling price of a product by the company, wherein the price of a product is determined by adding a profit element (percentage) in addition to the cost of making the product. There is a base price, determined by fixed costs to the business that the product cannot go under to be profitable, called the floor price. The ceiling price is the most that the market will bear, and the price of the product is somewhere in between the two. Cost-based pricing generally results in competitive prices. Companies that use this strategy may attract consumers who are looking for inexpensive products and services. Many companies that produce in masses use this pricing strategy, such as companies that produce textiles, food products and building materials.

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1) Discount and allowance pricing : Reductions to the selling price of goods or services applied anywhere in the distribution channel  between the manufacturer and middlemen (such as distributors, wholesalers, or retailers). Example : Discounts if product is paid by cash or buy in bulk.

2) Segmented pricing : A situation that occurs when a company sets more than one price for a product, focuses on customers characteristics. Example : Airline tickets, different prices for different classes.

3) Psychological pricing : . Example : Price reduced from RM 100 to RM 99.99.

4) Promotional pricing : Price reduction for given period of time. Example : stock clearance.

5) Geographic pricing : Setting different prices for the same product at different places. Example : Mc Donalds (Genting Highland & Airports)

6) Dynamic pricing : Price keep changing based on demand and supply. Example : Airline tickets (Air Asia)

7) International pricing : Setting different prices for the same product at different country. Example : LV handbag in Malaysia is more expensive than the ones sold in Paris.

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Internal factors affecting price

Cost:

While fixing the prices of a product, the firm should consider the cost involved in producing the product. This cost includes both the variable and fixed costs. Thus, while fixing the prices, the firm must be able to recover both the variable and fixed costs.

Product life cycle:

The stage at which the product is in its product life cycle also affects its price. For instance, during the introductory stage (by using penetration strategy) the firm may charge lower price to attract the customers, and during the growth stage, a firm may increase the price.

Promotional activity:

The promotional activity undertaken by the firm also determines the price. If the firm incurs heavy advertising and sales promotion costs, then the pricing of the product shall be kept high in order to recover the cost.

External factors affecting price

Competition:

While fixing the price of the product, the firm needs to study the degree of competition in the market. If there is high competition, the prices may be kept low to effectively face the competition, and if competition is low, the prices may be kept high.

Consumers:

The marketer should consider various consumer factors while fixing the prices. The consumer factors that must be considered includes the price sensitivity of the buyer, purchasing power, and so on.

Government control:

Government rules and regulation must be considered while fixing the prices. In certain products, government may announce administered prices, and therefore the marketer has to consider such regulation while fixing the prices.