Explain New Product Pricing strategies or, Explain Skimming Pricing and Penetration Pricing strategies.

New product pricing – There is great flexibility with the organisations in setting a price for a new product as compared to the product in other stages of life cycle. New product launch and its price are given lot of importance as these are extremely important activities of the overall marketing strategy of the organisation. The products in growth, maturity and decline stage face competition and give little choice in increasing the prices. New products on the other hand have little or no competition hence, can be utilised to generate high profits through Market skimming pricing strategy and Market penetration pricing strategy.

Skimming pricing strategy involves setting high profit margin relative to costs to “skim” as much profit as possible from the high demand in the market. Once the competitors enter the market with a similar or a substitute product, the organisation reduces the price of the product to make it available for price sensitive customers. Most of this strategy is directed towards the Innovators and Early adopters in the target market to “skim the cream” highlighting the unique product features, brand image, and quality. (Innovators – they are willing to try new ideas and are first to buy the new product. They help get the product exposure. Early adopters – these people adopt new ideas early but carefully. They serve as the opinion leaders. Early majority – these form around 34% of the market and adopt a new product earlier than an average consumer. Late majority – these people buy the product only after majority of the market has bought the product. They want to avoid the risk of buying a product with defects. Laggards – these are the people who mostly resist change and adopt a product only once it is not considered an innovation. They are tradition bound and buy the product as a tradition.)

For example, Samsung mobile’s launch of a new note series handset is priced high. After few months the price is generally lowered amidst competition.

Penetration pricing strategy involves setting a low price of the new product relative to costs to increase the market share in a short period. This strategy keeps the competitors away as the profit margins are low. The organisations objective is to gain market share and maintain it for a longer period through economies of scale. This strategy is mostly successful if the market is not big. Competitors usually enter the market which is big and the demand is high. For example, Motorola entered the Indian market through the launch of it Moto G models. The price of this model was kept fairly low as compared to competitive products offering similar features. The launch was such a great success that all the handsets of this model were sold within 20 minutes of its launch through Flipkart, an ecommerce giant, which was given exclusive selling rights.

Following any of the above strategies involves careful consideration of the costs, especially for the penetration pricing strategy. A certain price level or threshold should be realised so that the estimated profits can be earned through break-even analysis. The fluctuating demand in the market and the reaction of competitors can affect the pricing strategy negatively. The management should carefully monitor the price of the new product and they should be ready to make adjustments to the price in the best interest of the organisation, distributors, and customers.