Market skimming makes sense only under certain conditions. First, the product’s quality and image must support its higher price, and enough buyers must want the product at that price. Second, the costs of producing a smaller volume cannot be so high that they cancel the advantage of charging more. Finally, competitors should not be able to enter the market easily and undercut the high price. Market-Penetration Pricing Rather than setting a high initial price to skim off small but profitable market segments, some companies use market-penetration pricing. Companies set a low initial price to penetrate the market quickly and deeply—to attract a large number of buyers quickly and win a large market share. Market-penetration pricing Setting a low price for a new product to attract a large number of buyers and a large market share. Several conditions must be met for this low-price strategy to work. First, the market must be highly price sensitive so that a low price produces more market growth. Second, production and distribution costs must decrease as sales volume increases. Finally, the low price must help keep out the competition, and the penetration pricer must maintain its low-price position. Otherwise, the price advantage may be only temporary. 5 PRODUCT MIX PRICING STRATEGIES ExamDec 11, 2016 The strategy for setting a product’s price often has to be changed when the product is part of a product mix. In this case, the firm looks for a set of prices that maximizes its profits on the total product mix. Pricing is difficult because the various products have related demand and costs and face different degrees of competition.
We now take a closer look at the five product mix pricing situations summarized in Table 11.2 : product line pricing, optional product pricing, captive product pricing, by- product pricing, and product bundle pricing. Product Line Pricing In product line pricing , management must determine the price steps to set between the various products in a line. Product line pricing Setting the price steps between various products in a product line based on cost differences between the products, customer evaluations of different features, and competitors’ prices. Table 11.2 Product Mix Pricing Pricing Situation Description Product line pricing Setting prices across an entire product line Optional product pricing Pricing optional or accessory products sold with the main product Captive product pricing Pricing products that must be used with the main product By-product pricing Pricing low-value by-products to get rid of them Product bundle pricing Pricing bundles of products sold together The price steps should take into account cost differences between products in the line. More importantly, they should account for differences in customer perceptions of the value of different features.