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Pricing is an important parameter; organizations need to take care of while launching a new product or service in the market. Before deciding the price of a new product, it is essential for organizations to understand and also calculate total costs involved in the entire process of the product development be it designing, manufacturing or delivering the same. No organization works for charity and thus the price of a new product or service ought to be decided keeping in mind all such factors.
Penetration and skimming are two strategies which play a crucial role in deciding the price of a new product. When a new product is launched in the market, first and foremost it needs to meet and exceed the expectations of customers and then compete with other brands available in the market.
Competition does not really matter in the initial stages of product launch. What is more important at this stage is the survival of the product. Remember, price of a new product does affect the buying behaviour of end-users.
As an end-user if you come across a new product which is comparatively cheaper than the one you are already using, definitely you would not think twice before purchasing the same. The same happens in cases of new services as well. Why would you invest in an expensive holiday package when there is a new offer in the market at a comparatively low price?
Penetration refers to keeping the price of a new product relatively low such that it covers just the manufacturing costs while earning minimum profits for the organization. Keeping the price of a new product relatively low in the initial stages helps it penetrate the market easily and also get accepted among target audience.
Keeping the price a little low not only reduces the competition from other brands but also increases the sales and makes the product popular in the market. No one would even bother to look at your product if it is priced too high at the introductory stage, unless and until it has some exclusive features.
Organizations which depend on skimming strategy for pricing a new product often keep it at high prices and target only those who are actually interested in buying the new product. As against penetration strategy where the focus is to ensure the product is accepted by a wide range of audience, pricing as per skimming strategy ensures respective organizations earn huge profits. Organizations, in this case keeps a relatively high price for their products as they believe there is no harm in charging more from the end-users in exchange of a premium product.
A BMW or a Mercedes is never introduced at low prices as people do not mind paying for the comforts and luxuries, such brands offer. Can the price of a Maruti Suzuki car ever match with a BMW? Never. One dollar shops are very popular in US where products are priced at just one dollar. Such shops manage to earn huge margins as customers prefer buying more from these shops rather than burning a hole in their pockets.
Organizations dealing in premium products often depend on skimming technique to price their product. Trust me, keeping the price high, sometimes, ensures the product is not only exclusive but also offers additional features and benefits. Have you ever come across a low priced Hidesign Bag? Very rare. That’s the speciality and uniqueness of the brand.
A five star category hotel, if, introduces new deals and schemes for their regular customers, can never price it the way budget hotels do. Pricing also decides the premiumness of a certain brand.
A new product is also priced keeping in mind the paying capacity of target audience, prices offered by competitors and brand value.
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