Skimming PricingA firm introducing a new or innovative product can use skimming pricing, setting the highestinitial price that customers really desiring the product are willing to pay. These customers are notvery price sensitive because they weigh the new product's price, quality and ability to satisfytheir needs against the same characteristics of substitutes. As the demand of these customers issatisfied, the firm lowers the price to attract another, more price-sensitive segment. Thus,skimming pricing gets its name from skimming successive layers of "cream," or customersegments, as prices are lowered in a series of steps.Skimming pricing is an effective strategy when:1)enough prospective customers are willing to buy the product immediately at the highinitial price to make these sales profitable, 2)the high initial price will not attract competitors, 3)lowering price has only a minor effect on increasing the sales volume and reducingthe unit costs, and 4)Customers interpret the high price as signifying high quality. These four conditions are most likely to exist when the new productis protected by patents orcopyrights or its uniqueness is understood and valued by customers. Gillette adopted a skimmingstrategy for the MACH 3 shaving system since many of these conditions applied, includingpatent protection. Penetration PricingSetting a low initial price on a new product to appeal immediately to the mass market ispenetration pricing, the exact opposite of skimming pricing. Sony Corporation consciouslychose a penetration strategy when it introduced its play station video-game player. Sony'spenetration strategy was designed to quickly gain market share, attract price-sensitiveconsumers, discourage competitors from entering the market, and achieve a massive massmarket.The conditions favoring penetration pricing are the reverse of those supporting skimmingpricing. 1)Many segments of the market are price sensitive, 2)A low initial price discourages competitors from entering the market, and 3)Unit production and marketing costs fall dramatically as production volumesincrease. A firm using penetration pricing may (1) maintain the initial price for a time to gain profit lostfrom its low introductory level or (2) lower the price further, counting on the new volume togenerate the necessary profit. In some situations penetration pricing may follow skimmingpricing. A company might initially price a product high to attract price-insensitive consumers andrecoup initial research and development costs and introductory promotional expenditures. Oncethis is done, penetration pricing is used to appeal to a broader segment of the population andincrease market share.