What is the difference between skimming pricing strategy, penetration pricing strategy, and competitive pricing strategy?  

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Michael Ugulini eNotes educator| Certified Educator

Regarding these three pricing strategies, the difference lies in the strategic vision of the company that seeks to employ a particular pricing strategy. For example, pertaining to the skimming pricing strategy, a business will look to charge the highest price it can initially. This price is the highest price that the firm believes customers can bear, without offering “price resistance.” Subsequently, when the firm as exhausted the customer base willing to pay this higher price, it then lowers the price to secure purchases from the next customer group that is more price sensitive. The company, with a skimming pricing strategy will continue this practice until it gains sales from different customer bases that have different tolerances for prices.

Concerning a penetration pricing strategy, a business will do the opposite of the skimming pricing strategy. It will first offer its product or service at a very low price. This price will be significantly lower than what the regular or standard retail price will eventually be. A business will do this to bring new customers into their place of business. It’s a way to get more customers, and also a way to get new customers in the door. It’s also a strategy that involves putting pressure on their competitors. Can a competitor compete with this aggressive pricing? A penetration pricing strategy is a way to build market share for a product or service. However, a business must be careful not to erode their profit with this type of pricing strategy.

Regarding a competitive pricing strategy, a business will look at their competition, these days online and off-line, and determine their prices based on what their competition is doing. In this way, a business does not overprice their product, which will cause inventory to languish on shelves and in warehouses, or its services to be ignored by consumers. A business will also refrain from under-pricing their products and services when they employ a competitive pricing strategy. Therefore, this is a hedge against hurting their profit margins. They may have had an initial idea to slash their prices. However, upon investigating what their competition is doing, they may see that they do not have to cut prices so drastically, and can therefore, maintain a healthier profit margin.

pohnpei397 eNotes educator| Certified Educator

All of these strategies are quite different from one another.  In the penetration strategy, a firm is new to the market and sets its prices low so as to get as much market share as possible.  In the skimming strategy, the firm uses different pricing strategies at different times, perhaps starting with a high price to profit from wealthier customers or early adopters and then lowering the price later to attract a wider market.  Finally, the competitive strategy consists of reacting to one's competitors.  In this strategy, the firm reacts to price changes by competitors instead of initiating price changes on its own.

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