Marketing managers need to select the correct price for their product as part of the marketing mix. The three pricing strategies are price skimming, penetration pricing and status quo.
How to Price a New Product
Farmer Joe's Market has continued to thrive this year. His organic products, bakery goods and cooking classes have made his business a favorite place to shop for most of the town. Farmer Joe's daughters Apple and Peach have created a new product that they are petitioning to get added to the product offerings for the market. The product is a genetically altered broccoli that makes the product taste like rich chocolate. It will be called Choco-Broco. The daughters know that this will be a huge success, as parents always have had difficulty getting their kids to eat veggies. They hope to expand this product line flavor to other kid-averse veggies.
Their dad has agreed to stock the product, but everyone is confused as to how to price the Choco-Broco. In a late-night meeting, the family has decided to discuss what pricing strategy should be selected for the new product line. A pricing strategy sets the initial price of the product and provides a plan for price changes over time. There are three pricing strategies that Farmer Joe can choose from: price skimming, penetration pricing and status quo.
When Apple and Peach start to think about how to price their Choco-Broco, they first think about how much it costs to make. Choco-Broco was costly to develop due to the genetic-altering process involved. The daughters want to recoup their financial investment of $10,000 that was needed to fund the development of the chocolate-tasting broccoli.
A price strategy that would allow for the daughters to get their investment back would be a price skimming model. This strategy consists of charging a high introductory price in tandem with heavy promotion and later slowly dropping the price. Price skimming is usually used when the product has a strong, unique advantage that's not easily copied. It is also the best strategy to use when trying to recover large investments in development and marketing. Both Apple and Peach feel that this policy might be the answer to their price dilemma but are willing to continue researching the other pricing strategies to make sure they make the best decision possible.
Penetration pricing is when a company charges a low price for their product initially in order to reach the largest amount of their target market. This pricing philosophy believes that the more people that buy a product, the more positive word-of-mouth will occur, which will produce more sales and profits. The lower price will attract consumers to try a new product and also lead to a larger market share.
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This type of pricing strategy is best if the consumers are price-sensitive. Penetration pricing does discourage new competitors because they cannot match production with a lower price. Some companies run into difficulty when adapting penetration pricing. A low price can produce a huge demand for the product, and a company must be able to provide the volume demanded. If a shortage occurs, then the company will have disgruntled consumers who are unable to get a hold of the product.
The last issue with using a penetration pricing model is that, if used by a prestigious brand, it can cause loss in brand equity. For example, if a luxury car manufacturer introduces a low-priced starter sedan, it could dilute that brand's best strategy. A consumer who spends an enormous amount of money on a luxury sedan would feel that her social status has been minimized if her college-aged neighbor purchases a starter version of the brand. Apple and Peach will not offer penetration pricing, as they would not be able to make enough profit to recoup their $10,000 investment.
Status Quo Pricing
The last pricing strategy is called status quo pricing, which means matching competitors' pricing or charging close to the competition. Many clothing companies follow this type of pricing by sending out researchers to see what their competitors are charging for similar products. Airlines like to use status quo pricing as well to keep consumers.
Apple and Peach have noticed that bunches of regular broccoli sell for $3.00 each in stores. However, both Apple and Peach have disregarded status quo pricing since they do not have any real competitors yet. The product is new and unique, so they do not need to worry about any other farm growing the Choco-Broco.
Since Apple and Peach want to market their new chocolate-tasting broccoli at their dad's farmers' market, they need to choose the best pricing strategy in order to market their product effectively to the target market. They considered three options: price skimming, penetration pricing and status quo.
The daughters have decided to choose price skimming since they need to position the product as a premium choice for consumers and recoup their $10,000 investment. Since ordinary broccoli sells for $3.00 a bunch, the daughters have decided to price their new product at $5.00 a bunch.
After watching this lesson, you'll be able to apply three pricing strategies to a given situation: price skimming, penetration pricing and status quo pricing.
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