Why is penetration pricing more likely than skim pricing to raise a company's or a business unit's operating profit in the long run?
What will be an ideal response?
This question is especially important for pioneers/first movers into a new market. When pricing a new product, a company or business unit can follow a marketing strategy of skim pricing or penetration pricing. For new product pioneers, skim pricing offers the opportunity to skim the cream from the top of the demand curve while the product is novel and competitors are few. Penetration pricing offers the pioneer the opportunity to utilize the experience curve to gain market share and dominate the industry. Skim pricing is purely a short-term phenomenon and is used to gain high profits quickly in order to pay for expensive R&D and marketing costs before new entrants engage in price competition. It therefore cannot be used to raise long term operating profits unless the firm follows a differentiation strategy of continually entering markets early through exceptional R&D and exiting before the heavy-hitting late movers like IBM or Procter & Gamble force margins down.
You might also like to view...
When does absolute failure occur?
a. when the company prices the product to indicate that it is of the highest quality b. when there is too much synergy between the marketing and production departments c. when products deliver a meaningful and perceivable benefit d. when a company cannot regain its development, marketing, and production costs for a new product
What lot-sizing technique is generally preferred when inventory holding costs are extremely high?
A) lot-for-lot B) EOQ C) POQ D) the Wagner-Whitin algorithm E) All of the above are appropriate for the situation.