Question No. 12 - Principles of Marketing BCOE - 141

 

Solutions to Assignments 

BCOE - 141 - Principles of Marketing

Question No. 12

Distinguish between the following: 

(a) Skimming and penetration pricing         (b) Product and services

a) Skimming and Penetration Pricing

• Definition of Penetration Pricing

Penetration Pricing implies a pricing technique in which new product is offered at low price, by adding a nominal markup to its cost of production, to penetrate the market as early as possible. It aims at maximizing the market share of the product, and once it is achieved, i.e. when the demand picks up, the firm can increase the price of the product.

Penetration pricing results in lower profits in the short run, however, in the long run, it results in higher profits because it increases the market base. The reasons behind adopting penetration pricing are as under:

• New product offered by the firm is already provided by other well-established brands. The low price will lure customers to switch to the new product, who are already familiar with other brands.
• It can help in increasing sales of the product in short period.
• It restricts new entrants from entering the market.

• Definition of Skimming Pricing

The pricing strategy in which high markup is charged for the new product, leading to the high price, so as to skim the cream from the market, is known as Skimming Pricing. It entails fixing a high price for the new product before other competitors step into the market.

This technique is used in case of new product, which faces no to little competition in the market, and have a great extent of consumer acceptability. Market skimming pricing is adopted by the company, due to the following reasons:

• In the early stages, the demand for the product is inelastic, till the product occupies a good position in the market.
• In the initial phase, the demand for the product is not known, and high price helps in covering the cost of production.
• In the beginning, there is a huge requirement of capital for producing the product, resulting in high production cost. Further, a huge amount is invested in the promotional activities, that also adds to its cost. When the product is charged high, it will cover the cost of production and promotion expenses easily.

Key Differences Between Penetration Pricing and Skimming Pricing

The difference between penetration and skimming pricing are presented hereunder:

1. Penetration Pricing can be described as a pricing method adopted by the firm to attract more and more customers, in which the product is offered at low price at the early stage. Conversely, skimming pricing is used to mean a pricing technique, in which high price is charged at the beginning to earn maximum profit.
2. Penetration pricing aims at achieving a greater market share, by offering the product at low prices. As against the object of using skimming pricing strategy is to earn maximum profit from the customers, by offering the product at the highest price.
3. Penetration pricing strategy is put into practice when the demand for the product is relatively elastic. On the other hand, skimming pricing is used when the demand for the product is inelastic.
4. In case of penetration pricing, the profit margin is low, whereas, in skimming pricing, the profit margin is very high.
5. As the price of the product is initially low in penetration pricing, huge quantities of product is sold by the firm. As against, due to high price of the product customer demand small quantity of the product, in case of skimming pricing.

b) Product and Services

1. Products are tangible – they are physical in nature such that they can be touched, smelled, felt and even seen. Services are intangible and they can only be felt not seen.
2. Need vs. Relationship– a product is specifically designed to satisfy the needs and wants of the customers and can be carried away. However, with a service, satisfaction is obtained but nothing is carried away. Essentially, marketing of a service is primarily concerned with creation of customer relationship.
3. Perishability- services cannot be stored for later use or sale since they can only be used during that particular time when they are offered. On the other hand, it can be seen that products are perishable. For example, fresh farm and other food products are perishable and these can also be stored for later use or sale.   
4. Quantity- products can be numerically quantified and they come in different forms, shapes and sizes. However, services cannot be numerically quantified. Whilst you can choose different service providers, the concept remains the same.
5. Inseparability- services cannot be separated from their providers since they can be consumed at the same time they are offered. On the other hand, a product can be separated from the owner once the purchase has been completed.  
6. Quality- quality of products can be compared since these are physical features that can be held. However, it may be difficult to compare the quality of the services rendered by different service providers.
7. Returnability- it is easier to return a product to the seller if the customer is not satisfied about it. In turn, the customer will get a replacement of the returned product. However, a service cannot be returned to the service provider since it is something that is intangible.
8. Value perspective- the value of a service is offered by the service provider while the value of the product is derived from using it by the customer. Value of a service cannot be separated from the provider while the value of a product can be taken or created by the final user of the product offered on the market.
9. Shelf line- a service has a shorter shelf line compared to a product. A product can be sold at a later date if it fails to sell on a given period. This is different with regard to a service that has a short shelve line and should be sold earlier.