When a company launches a new product, it must decide on a pricing strategy that aligns with its goals—whether to maximize short-term profits, gain market share, or build brand awareness.
Thank you for reading this post, don't forget to subscribe!Two common strategies for New Product Pricing Decisions are:
- Price Skimming
- Penetration Pricing
1.) Price Skimming:
Price skimming is a strategy where a company sets a high initial price for a new or innovative product and then gradually lowers it over time.
- This method is used when the product is new, unique, or high-tech, and there is little or no competition.
- The high price helps the company recover development costs quickly and earn maximum profit from early adopters who are willing to pay more. Over time, the price is reduced to attract a broader market.
Example:
When Apple launches a new iPhone or when Sony releases a new gaming console, they often start with a high price which is later reduced.
Advantages:
- Recovers development and launch costs quickly
- Signals high quality or exclusivity
- Maximizes profit from customers who are not price-sensitive
Disadvantages:
- May attract competitors quickly
- Limits mass market adoption in early stages
- Not effective if the market is price-sensitive
2.) Penetration Pricing:
Penetration pricing is a strategy where a company sets a low initial price to quickly attract customers and gain a large market share.
- This is used when the goal is to enter a competitive market, build customer base, and discourage competitors.
- The low price helps to attract more customers, increase sales volume, and create brand recognition.
Example:
When a new internet service provider enters the market, they may offer very low prices for the first 6 months to attract subscribers.
Advantages:
- Quickly captures market share
- Builds brand loyalty and recognition
- Discourages new competitors due to low pricing
Disadvantages:
- May lead to low short-term profits
- Customers may expect low prices in the long term
- Difficult to raise prices later without losing customers