6.9 : New-Product Pricing Strategies

The two most popular new product pricing strategies are market skimming and market penetration pricing.

• Market Skimming: involves setting high prices for new products or services during the introductory phase to target "early adopters" willing to pay a premium. After maximizing profits from these customers, the company gradually lowers prices to attract a broader customer base. For example, Apple launches new iPhone models at high prices and lowers them over time. Pharma companies also use this strategy for new drugs, initially pricing high to recoup development and marketing costs, then lowering prices as patents near expiration and generics enter the market.
• Market Penetration: sets low initial prices to quickly reach many consumers, gain market share, and discourage competitors. It is often used in highly competitive markets or where there is a need for mass adoption to succeed. For instance, Netflix initially offered low subscription rates to attract a large user base and establish dominance in the online streaming industry.

Both strategies can be effective, but they serve different purposes. While skimming aims to maximize profit from high-end consumers, penetration pricing seeks to build market share and create barriers to entry for competitors. The choice of strategy depends on various factors, such as the nature of the product, market conditions, and company objectives.