Your goal is to create a market and penetrate it. With such a unique, proprietary solution there is neither a reference price nor direct competition. Think of the case of Maglev magnetic trains, first patented about 60 years ago.

Type of innovation: Breakthrough or just me-too?.

Here are five points for making an informed decision: Often, too little attention is paid to mid-term monetization routes, or how companies will ultimately make money.Ī penetration or skimming strategy for your innovation will only make sense under certain conditions. You need to be able to follow through on future price increases planned when deciding to pursue this strategy. We have seen many companies, including Silicon Valley firms, fail with a penetration pricing strategy. If you gain many customers early on in such markets, you are better positioned to maximize customer lifetime value from future sales and upsells. The high volume compensates for thin unit margins. They rapidly penetrate the market, bring down unit costs, build up a loyal customer base, and create barriers to entry. Amazon, Facebook, and Uber are well-known examples here, where network effects dominate the market. In contrast, penetration pricing means you offer a low price to attract many customers. Then, the price is steadily reduced over time to attract customers on a budget, who are happy to buy your highly esteemed product for a “bargain”. In the beginning, you make less but more profitable sales because only early and eager buyers are willing to pay more. With skimming, your prices are set high to maximize profits in the short term by targeting the customers most interested in your product.

Apple is a prime example of a company following this strategy. Skimming means to gradually skim the layers of “cream” from the market. It boils down to a choice between two strategies: Skimming or penetration pricing. Defining the pricing strategy essentially determines the economics of the product’s entire lifecycle. Many companies fall into the trap of leaving the price decision to last minute, with almost no time for analysis or research.Ī high price creates a sense of premium or exclusivity around the product, whereas a low price might aim at luring customers from potential competitors. You have to set prices for the first time, and this price reveals a lot about your product.

But having never priced the product before, how do companies know what to put on the price tag? In part 8 of our Pricing Basics series, Jan Haemer discusses conditions and success factors in deciding between two pricing strategies for new products: Skimming and penetration pricing.ĭetermining the right pricing strategy is an especially challenging aspect of launching a new product or service. All new hit innovations need a winning price.

Penetration pricing is quizlet