What are the differences among the following pricing strategies: Skimming, Penetration, and Competitive?
a. Skimming
Small business owners price their goods and services using strategies that fit their target markets' budgets. Price skimming is a type of strategy that businesses use when they are first to enter the market with a product or service. With price skimming, when a product is released, it's offered at high price and then lowered later in the product's life cycle or when competition begins to enter the market.
b. Penetration
Penetration pricing is the practice of setting an initial price much lower than the eventual standard price. "A penetration strategy is the price war; this strategy goes for the deepest price cuts driving at every moment to have your price be the lowest on the market," reports Joern Meissner, of Meissner Research Group, a Lecturer in Management Science at the Lancaster University Management School. Customers who are looking for the best bargain will switch their loyalty to you if you can entice them with the lowest prices. This strategy works best during a product's growth phase, since the product already has a positive reputation.
Penetration pricing can bring new customers into your store, increasing market share and building customer loyalty. However, when implemented incorrectly, it may cause you to lose money and may increase competition rather than decrease it. To price products most effectively, consider your cost/profit objectives, customers, the product's life cycle and your competition.
Use penetration pricing only if you need an exceptionally low price to drawn attention from customers or to scare away competitors. You will have the most success when the given product is mass-produced since the cost per unit is usually lower. Your business must be able to absorb any loss incurred when you slash prices, so make sure you have enough reserve funds to keep the business afloat.
c. Competitive
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What is 'Competitive Pricing'
Competitive pricing is setting the price of a product or service based on what the competition is charging. Competitive pricing is used more often by businesses selling similar products, since services can vary from business to business while the attributes of a product remain similar. This type of pricing strategy is generally used once a price for a product or service has reached a level of equilibrium, which often occurs when a product has been on the market for a long time and there are many substitutes for the product.