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Price skimming and penetration pricing are marketing strategies typically implemented when businesses commit to a launch of new services or products. Reliant on low upfront prices, penetration pricing attracts customers in a straight forward fashion. Skimming aims to make the most through short-term profits by offering high upfront prices to the most interested and eager consumers (Nagle, Hogan, & Zale, 2016). A good example of penetration pricing is Walmart. They offer the lowest price guaranteed on many of their products and will price match if customers find lower prices elsewhere. For a skimming example, Apple offers high prices for their latest release iPhones to interested customers and then, over time, the same model’s price lowers due to decreased demand and popularity. Both pricing strategies aim to make profits, yet one is aiming for long-term profits versus short-term profits.
There are three pricing strategies that any business must consider. Customer value-based pricing, competition-based pricing, and cost-based pricing that would then allow one to choose what pricing model to follow (Schindler, 2011). If a business has a lot of liquid capital due to high profitability, they can afford to do penetration pricing, especially if their costs are kept low to maintain competitive advantage, and thus do a competition-based pricing, like Walmart does. Apple Inc., has high profits and does customer value-based pricing because customers attach a lot of value to their products, similar to clothing brands like Chanel. Therefore, they adopt a skimming pricing practice.
When a company attaches a high or low price to a product or service, they are adding perceived value to a product and showing how competitive they aim to be in relation to their competitors (Nagle, Hogan, & Zale, 2016). Because Apple was the first to truly introduce a smart phone, they became the leader in that area. Therefore, their marketing lent towards adding perceived value to the phone.
Nagle, T. T., Hogan, J., & Zale, J. (2016). The Strategy and Tactics of Pricing: New International Edition. London, England: Routledge.
Schindler, R. M. (2011). Pricing Strategies: A Marketing Approach. Thousand Oaks, CA: SAGE Publications.
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