Examine the conditions under which “Market Skimming Pricing” and “Market penetration Pricing”

When a new product is launched in the market at a high price and later the prices are reduced to capture other market segments, it is known as Price Skimming Policy. For example, Nokia launches its new mobile phones at high price for the upper class, gradually it decreases the price for other segments.

Following conditions should prevail in the market for using market skimming price.

(1) Inelastic Demand: Demand of the product must not be affected by the change in price.

(2) Cost of Production: For producing goods in small quantity average cost of production should be low.

(3) Sufficient Demand: When introducing product at a high price, markets answers that there are buyers who can afford the product.

(4) Upper Class Product: Product is exclusively introduced to capture the higher class of the society.

(5) Less Competition: There is no threat of competitors or protected by entry barriers. When all these conditions prevail in the market, a firm prefers to use market skimming price strategy to earn maximum profit and maximize market share. Basically a firm looks at the threat of competitors or the new entrants before making a choice between the two strategies.

Distinguish between:

(i) FOB-origin pricing and FOB contract pricing
(ii) Zone-pricing and Basing-point pricing
(iii) Cumulative discount and non-cumulative discount
(iv) Fixed pricing and flexible pricing
(i) FOB-origin pricing.

Customers bear the entire transportation cost.

Price is high for distant customers.

Distant buyers may switch to competitors.

FOB contract pricing: Buyers pay a uniform price as decided by the seller. Price is same for all the customers irrespective of location.

No such risk.

(ii) Zone pricing: The market is divided on the basis of geographical locations in this method.

The product is sold at one price in one zone.

Basing-point pricing: Company selects a city or town as a basing point and charges the transportation cost from that point.

(iii) Cumulative discount: Quantity discount is allowed to the buyer for all the purchase over a stated period of time.

Non-cumulative Quantity discount: Quantity discount is allowed to the buyer on each single purchase.

(iv) Fixed price policy: It is when a company sets a fix price for a particular product and same price is charged from all the customers. It is favourable for a company as the buyer could self on the company and does not think a lot before buying a certain product. Buyers do not have to waste time negotiating the price of the product. It helps the company to build a quality brand.

Flexible pricing: It is charging different price from different buyer. Flexible pricing helps the seller to charge high from buyers and earn good amount of profits. It is favorable for the customers who know the art of negotiating the.

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