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Market Penetration vs Market Skimming

Market Penetration and Market Skimming

In our previous article, we talked about the main price strategies that companies use to price their products and services. In this article, I would like to talk about price strategies, market penetration and market skimming.

When a new product or service is launched, it is very difficult to determine its price. Therefore, two strategies are used. These are market penetration and market skimming.

Market penetration pricing sets a low starting price for the product or service in order to both quickly attract a large number of customers and enter the market deeper and faster.

For example; Ikea first opened stores in China in 2002. Instead of buying household items, people came to take advantage of freebies like air conditioning, clean toilets, and even decorating ideas. Since Chinesee people were quite frugal, they were shopping at stores that sold imitations of IKEA products at more affordable prices.

Realizing this, IKEA marketing executives reduced their prices in China to the lowest level in the world to win Chinese customers. In fact, it was the opposite of the approach of many Western retailers there. The retailer further stocked its stores in China with Chinese-made products. Thus, it reduced the prices of some products by 70 percent compared to IKEA’s sales points outside of China.

ikea market penetration

The penetration pricing strategy worked. IKEA currently has a 43 percent market share alone in China’s rapidly growing home products market. Many stores’ sales increased by 25%. The Kavernoz Beijing store attracts around six million visitors a year. The weekend crowds are so large that employees have to use megaphones to stay in control.

Market skimming strategy; is to keep the price of the product or service higher than its competitors while entering the market.

One of the brands that successfully use this strategy is undoubtedly Apple. When Apple first introduced the iPhone, its initial price was around $ 599. Customers who really wanted the phones and were willing to pay a large amount of money bought them.

A few months later, Apple reduced the price to $ 399 for an 8GB model and $ 499 for the 16GB model to attract new customers. Within a year, it lowered its prices by constantly updating its prices. Thus, Apple has generated quite a large amount of revenue from various segments of the market.

This strategy only works under certain conditions. First of all, the quality and image of the product should support the price to be determined. Thus, sufficient number of customers should be willing to buy the product at this price. Competitors should not be able to enter the market easily. Also competitor should not be able to set lower prices below the high price.

Reference

Kotler, P. (1997). Gary Armstrong. Principles of marketing.

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