Choosing between penetration and skimming pricing for a high definition TV

The two pricing policies

Skimming pricing launches at a high price aimed at the buyers who want the product most and mind the price least, earning a high margin from them first; the price then comes down in steps as wider groups are approached.

Penetration pricing launches at a low price so that sales spread fast, the firm gets a big base of buyers early, and volume brings unit costs down; the thin margin also gives rivals little reason to enter.

Factors to consider in making the choice

These are the general factors that affect any price (cost, demand, competition and the firm's objectives), applied to the launch decision.

1. Newness and distinctiveness of the product. A TV with genuinely new technology (a new display type, much larger screen or unique features) favours skimming; a model similar to many others favours penetration.
2. Price elasticity of demand. If buyers are very price-sensitive, a low price expands sales greatly (penetration); if a segment values quality and status and is not price-sensitive, skimming works.
3. Competition. Many established brands at similar specifications make skimming hard; if the firm has a temporary lead, it can skim.
4. Cost structure and scale economies. If costs fall sharply with volume, penetration pays; if the firm cannot produce large volumes yet, skimming fits limited supply.
5. Recovery of investment. High research and development costs that must be recovered quickly favour skimming.
6. Brand image and positioning. A premium brand protects its image with skimming; a value brand uses penetration.
7. Life-cycle expectations. If the technology will soon be copied or overtaken, the firm may skim quickly; if it expects a long life, it may build share through penetration.
8. Distribution and dealer margins. Dealers' margins and the firm's channel reach affect the price it can set.
9. Government policy and taxes. Import duties on panels and GST rates affect costs and price levels.

The choice for a high definition TV

High definition is an established feature rather than a new technology, so the set would enter a market where rival brands already offer it and buyers can compare prices easily, especially online; component costs also fall with volume. Unless the set has a clearly superior feature, I would choose penetration pricing: a competitive launch price, festive offers and easy EMI: to build volume and share, and then add premium models later. Skimming would be appropriate only for a genuinely new display technology aimed at affluent early adopters.