Pricing is one of the 4Ps that comprise the marketing mix. Prices of products have a key role to play in determining their movement in the market. There are two pricing strategies applied in setting up prices for commodities. The first one is penetration strategy. This involves setting up low prices for the goods to attract more customers, (Hinterhuber, 2008). The aim is to introduce the product into the market and establish a market share. The second strategy is skimming which involves orienting the product into the market at high prices. The goal is to recover costs associated with the development of the product in a short period as well as establish the product as unique in the mind of the consumer. The strategy targets the wealthy class in the society who associate high prices with quality and as such is willing to buy, (Park, MacLachlan, and Love, 2011). These two pricing strategies have their strengths and weaknesses. Therefore, in choosing the strategy to use for a new product, the benefits of each should be analyzed and a choice for the better option made.
Penetration strategy can be used to achieve high volume sales. It applies the low prices aspect to attract more customer base, (Hinterhuber, 2008). Most people who make up the bigger part of the customer base are middle-class earners. Their disposable income is low, and therefore, they are willing to purchase more with a reduced price. Skimming strategy, on the other hand can help achieve high revenue. This is because it targets the rich in the society who are willing to buy at high prices as long as they are convinced the commodity is of a higher quality. This class makes up a small percentage of the consumer base. For a new product that is first getting into the market, the idea of creating a market share should be paramount. Once the product has been known by consumers, then price adjustment can be considered.
Penetration pricing strategy also works to discourage competitors from entering the market. This is because lower prices give them the impression of small profit margins. With reduced competition, the company can make significant sales and quickly establish a market share. Skimming, on the other hand, does not consider the competition. The prices are set with the only aim of recovering costs and achieving high-profit margins. This strategy is risky because if the product is not well received by consumers, it will experience stagnation which will end up resulting in losses. Additionally, competitors can enter the market quickly and undercut the high price.
Penetration strategy also allows for adjustment of prices in future. Low prices are more flexible to adjust in comparison to higher prices. This makes it easier to adapt to the increasing competitiveness in the market. It is simpler to increase lower prices to higher prices when the economy demands that than it is to raise already high prices to an even higher price. This means that skimming makes it hard to have a price increase in future, even in the event of increased competition, (Lowe, and Alpert, 2010).
There are two main types of distribution channels that can be used for a new product, namely direct and indirect distribution channels, (Kurata, Yao and Liu, 2007). A direct system involves the product moving from the producer to the final consumer with no intermediaries. An indirect system uses intermediaries between the producer and the end user. Usually, indirect distribution results to a higher price for the end user due to the existence of the middle-men who are also out to make some earnings in the process. Therefore, for a new product that is entering the market, direct distribution is recommended.
In conclusion, pricing strategy is a major factor in determining how fast commodities move in the market and whether the product will survive the market forces or will be wiped out. For a new product, penetration pricing strategy is preferred as it stands higher chances of guaranteeing product sustainability in the market. Direct distribution is also a better plan than indirect distribution.
Hinterhuber, A. (2008). Customer value-based pricing strategies: why companies resist. Journal of business strategy, 29(4), 41-50.
Kurata, H., Yao, D. Q., & Liu, J. J. (2007). Pricing policies under direct vs. indirect channel competition and national vs. store brand competition. European Journal of Operational Research, 180(1), 262-281.
Lowe, B., & Alpert, F. (2010). Pricing strategy and the formation and evolution of reference price perceptions in new product categories. Psychology & Marketing, 27(9), 846-873.
Park, J. H., MacLachlan, D. L., & Love, E. (2011). New product pricing strategy under customer asymmetric anchoring. International Journal of Research in Marketing, 28(4), 309-318.
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