Unformatted text preview: itors. As long as demand is greater than supply,
skimming is an attainable strategy.
PENETRATION PRICING. This method is at the opposite end of the spectrum from skimming.
With this method, a firm charges a relatively low price, hoping to reach the mass market in the
early stages of the product life cycle. The low price allows the product to penetrate a large portion
of the market, resulting in large market share and lower production costs. This strategy is
successful when (1) the market is price sensitive, (2) economies of mass production are feasible,
and (3) the firm has substantial resources to sustain the short-run losses necessary to obtain
STATUS QUO PRICING. With this method, price is set identical or close to that of the
competition. This strategy may be used more often by small firms for survival or ease of use but
ignores demand and cost. This strategy can be successful when (1) the firm is comparatively
small and (2) the firm needs a safe route to long-term survival.
KEY: CB&E Model Pricing OBJ: 20-1 TOP: AACSB MSC: BLOOMS Synthesis 4. List the three basic pricing methods. Name one advantage and one disadvantage associated with
using each method.
PRICE SKIMMING advantages include (1) quick recovery of product development or
educational costs, (2) pricing flexibility that allows subsequent lowering of price, and (3) the
ability to market prestige products successfully. Disadvantages include encouragement of
competitive entry into the market.
PENETRATION PRICING advantages include (1) a tendency to discourage competitive entry,
(2) large market share due to high volume sold, and (3) lower production costs resulting from
economies of scale. Disadvantages include (1) lower profits per unit, (2) higher volume required
to reach the break-even point, (3) slow recovery of development costs, and (4) inability to later
STATUS QUO POLICIES have the advantage of simplicity. Their disadvantage is that the
strategy may ignore demand or cost or both.
KEY: CB&E Model Pricing OBJ: 20-1 TOP: AACSB MSC: BLOOMS Synthesis 5. Describe which pricing method (skimming, penetration, or status quo) would be most appropriate
for each of the following products: (1) a new kind of automatic vacuum cleaner; (2) brightly
colored wooden blocks to be used as a child’s toy; (3) a new, low-cost, no-calorie fat substitute;
(4) a home computer; and (5) a designer perfume. Briefly justify your answers. ANS:
VACUUM CLEANER. Skimming could be used because there are innovators and early adopters
who would like to be “first” to own the product. It is likely that competition could also follow
fairly quickly, further justifying a skimming policy.
CHILD’S BLOCKS. Status quo pricing could be used because this type of toy is a mature
product with many substitutes. Penetration pricing could be argued if one assumes the producer
found manufacturing cost advantages.
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- Fall '13
- Marketing, AACSB Reflective, CB&E Model Strategy, CB&E Model