Question

‘Pricing can also be used as a demarcation, to differentiate and enhance the image of a product’ 

(I) In the light of the above statement, explain Penetration and Skimming as two important pricing strategies that can be used by an entrepreneur. 

(II) Give any two advantages of both Penetration and Skimming strategies.

Answer 1

(I) Penetration pricing is a pricing strategy where the price of a product is initially set at a price lower than the eventual market price to attract new customers. Skimming Pricing Strategy is used when goods are sold at higher prices so that fewer sales are needed to break even. 

(II) Advantages of Penetration pricing strategy: 

• It can result in fast diffusion and adoption. This can achieve high market rates quickly. This can take the competitors by surprise, not giving them time to react. 
• It discourages the entry of competitors. Low prices act as a barrier to entry. 

Advantages of Price Skimming strategy: 

• Price skimming helps the company in recovering the research and development costs which are associated with the development of a new product. 
• If the company caters to consumers who are quality conscious rather than price conscious, then this type of strategy can work in a great way for a company.