Penetration pricing strategy how to#

The two common implementations of skimming are at new product launch and at the end of a product's life. Companies skim in an effort to segment the market, to get the customers who are willing to pay more to do so. Skimming is the opposite of penetration pricing.

Penetration pricing strategy how to#

Related: How to Formulate A Premium Pricing Strategy The forward part of the name indicates you're looking forward in time to estimate what your costs will be and using that cost as your basis for pricing. However, if you know that once you sell a million units, your costs will go down to $0.30, you may be willing to sell at a price lower than your current costs knowing that your costs will be lower in the future. If you're building a product and it costs $1 to make, you probably don't want to sell it for less than $1. Penetration pricing in this situation may also deter other companies from competing when they recognize there are not huge profits to be gained.įorward pricing is another term similar to penetration pricing, but with a focus on future costs. This strategy works best when you are the first entrant, or one of the first entrants, into a market. Low pricing is often justified to quickly grow a new market and to gain the largest share as the market grows. No company wants to lose market share, and if you lower your price in an effort to gain market share, your competitors are likely to lower their prices just to keep their share.Ī more appropriate and common use of penetration pricing is to speed up the growth of a newly forming market. It can be used to gain market share relative to your competition - but be careful. Penetration pricing means pricing more aggressively than neutral. Although you may use a combination of neutral, penetration, and skimming prices, you will most often use neutral. As you walk through a grocery store, the prices you see are neutral. Most pricing in relatively stable markets would be considered neutral. You aren't trying to gain or lose market share. From this perspective, think of neutral pricing as maintaining the status quo. Some will like your offering better, others will like your competitor's better. Of course not all customers will be indifferent. Neutral pricing, the most common pricing strategy, means that you price so that your customers are relatively indifferent between your product and your competitor's product after all features and benefits, including price, are taken into account. A better way to look at this is that these are pricing strategies to define the general level of prices. These certainly are pricing strategies, but they are not the only ones. Do a Google search on 'pricing strategy,' and you'll find the same answer over and over: neutral, penetration, and skimming. When you ask a marketer 'What are some pricing strategies?' you will likely get the answer that there are three pricing strategies: neutral, penetration and skimming.

They are your pricing processes and policies. Remember that pricing strategies are big-picture decisions that provide guidance to the people within your organization who actually set prices. Price may not be the basis of your corporate strategy, but you must have a pricing strategy to implement your corporate strategy. In this edited excerpt, he explains several important pricing concepts.

In Impact Pricing: Your Blueprint for Driving Profits from Entrepreneur Press, pricing expert Mark Stiving offers practical advice to business owners on how to price products and services.