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Skimming and penetration pricing strategies a thing of the past

price tag

Pricing products at a high price or a low price to attract consumers are no longer widely used strategies, according to new study published in Marketing Science journal.

The research found that the strategies of skimming, pricing products at high prices in order to drive demand and motivate shopping for quality, and penetration, launching products with low and often below cost prices to capitalize on the market early, are no longer being used to push sales.

The pricing of digital cameras was used as a focus area, which saw penetration and skimming strategies being used to sell only 20 per cent of products. 60 per cent of cameras were pushed by competitive or market pricing strategies.

According to UTS Business School Associate Professor Marc Fischer, who conducted the study alongside Professor Martin Spann of Ludwig-Maximilians-University, Munich, and Professor Gerard J. Tellis, Marshall School of Business, University of Southern California, the focus on digital cameras was chosen specifically because of the competitive nature of pricing strategies and the wide market of brands.

Using a case study of 663 products and 79 brands over four years, researchers looked at what strategies were being used in the early stages of a product entering the market.

“Some competitors would undercut the skimming price, which limited the margin available, others would match the penetration price, preventing economies of scale,” Associate Professor Fischer said.

“Firms seem to follow a portfolio approach in their choice of pricing strategy, with various products in their product line launched at various times and targeting various consumer segments.”

Overall, the study found companies are looking at areas like competition and brand reputation, pricing according to the market and their business’ traits.

According to a corresponding article published on the UTS website:

So, for instance, using a price skimming strategy for products where it is possible to extract higher margins might cross-subsidise a penetration strategy for other products.

The study indicated that market pricing and penetration strategies occur more often after a market has taken off, he says. Market pricing is also more likely to be adopted by late entrants, whereas firms with an established reputation in the market tend to use a skimming strategy.