Why might a business choose skimming pricing over penetration pricing?

A business might choose skimming pricing over penetration pricing to maximise profits from early adopters and create a premium brand image.

Skimming pricing, also known as price skimming, is a pricing strategy where a business sets a high price for a new product or service at its introduction, then lowers the price over time. This strategy is often used for innovative products, where early adopters are willing to pay a premium to have the product first. The high initial price helps the business recover its development costs quickly and maximise profits from these early adopters.

For instance, technology companies often use skimming pricing for new gadgets. The high price tag not only covers the research and development costs but also creates a sense of exclusivity and premium quality around the product. This can enhance the brand's image and attract customers who are willing to pay more for perceived quality and status.

Moreover, skimming pricing can also act as a market segmentation tool. By setting a high initial price, a business can target the upper segment of the market that is less price-sensitive. Once this segment is saturated, the business can then lower the price to attract more price-sensitive customers, effectively capturing different segments of the market at different times.

On the other hand, penetration pricing involves setting a low initial price to quickly gain market share. While this strategy can lead to rapid growth, it may also lead to lower profit margins and potentially devalue the product in the eyes of consumers. Therefore, if a business wants to position its product as high-end or exclusive, or if it needs to recoup substantial development costs quickly, skimming pricing may be a more suitable strategy.

In conclusion, the choice between skimming pricing and penetration pricing depends on various factors, including the nature of the product, the target market, and the business's financial and branding objectives. Skimming pricing can be an effective strategy for businesses aiming to maximise early profits, create a premium brand image, and segment the market effectively.