Question 4 (a)
Penetration and skimming pricing, applied to a health drink and an electric car
8 marks
- Time to write
- About 16 minutes
- Topic
- Pricing
Question
Question 4 (a) · 8 marksDifferentiate between a penetration pricing strategy and a skimming pricing strategy. Discuss how suitable these pricing strategies are for the products below:
Health drink
Electric car
Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- Differentiate…Discuss…Two asks in one question: answer both.
- Differentiate betweenSet the differences out in a table, basis by basis, not as two separate essays.
Write it in this order
- Read; underline the asks; jot your points 1 min
- 1 Difference between penetration and skimming pricing 4 marks 7 min
- 2 Suitable strategy for the health drink 2 marks 3 min
- 3 Suitable strategy for the electric car 2 marks 3 min
- Check: every ask answered, key terms underlined 2 min
Short on time? Trim steps 1–3 evenly rather than skip one: each is capped at its own marks.
Try it first. About 16 minutes for 8 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
Penetration and skimming pricing differentiated
Both are pricing strategies for a new product. Which suits a product depends on the factors that affect any price: cost, demand and its sensitivity to price, competition and the firm's objectives.
1Launch week: the earbuds sit on a pedestal, and the keenest buyers pay the full bag.
Skimming pricingLaunching a new product at a high price aimed at the buyers who want it most and mind the price least
2The calendar turns, rivals arrive—the price steps down and the queue widens.
SkimmingA skimming price is usually cut in steps as competition grows
3Penetration is the opposite bet: a street price from day one, and the whole bazaar adopts it.
Penetration pricingLaunching a new product at a low price so that it spreads fast and the firm builds a large base of buyers early
- Price skimming opens with a high price, taking the cream of the market, the buyers who will pay most for something new, and then brings the price down in steps to draw in buyers who care more about price.
- Penetration pricing opens with a low price so that the product spreads fast, gains a wide base of buyers and reaches volumes at which unit costs fall.
| Basis | Skimming pricing | Penetration pricing |
|---|---|---|
| Initial price | High | Low |
| Objective | Quick recovery of development cost; high profit per unit | Large market share and volume |
| Suitable when | The product is new, distinctive or prestigious; demand is inelastic; competition can be kept out for a time | Demand is price-sensitive; competition is strong; costs fall with volume |
| Customer segment | Innovators and less price-sensitive buyers | The mass market |
| Image | Premium, high quality | Value for money |
| Later price movement | Price is reduced over time | Price may be raised slowly, or held |
| Risk | Attracts competitors by high margins | Low margins; difficult to raise price later |
Penetration pricing is more suitable. A health drink is a frequently bought consumer product. Where a new brand enters a market with established rivals whose products look much alike to the buyer, buyers compare prices and switch easily. A low introductory price, often with trial packs or sachets, encourages trial, builds repeat purchase and wins shelf space and volume, which lowers unit cost.
Skimming pricing is more suitable for a new electric car with distinctive technology. Development costs are very high and the early buyers are technology enthusiasts and higher-income customers who value the novelty and prestige and are less sensitive to price. A higher initial price recovers costs and supports a premium image; the price can be lowered later, or cheaper variants added, as battery costs fall and competition grows. (If the car were a basic model aimed at the mass market against established petrol cars, a lower entry price would be needed instead.)
In both cases the choice also depends on production capacity, the firm's image, the speed with which competitors can copy the product, and the firm's objective of profit or market share.
Where the 8 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Difference between penetration and skimming pricing | 4 |
| 2 | Suitable strategy for the health drink | 2 |
| 3 | Suitable strategy for the electric car | 2 |
| Total | 8 |
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