Name and describe the three basic strategies for setting a price on a new good or service. Under what conditions is each of the three basic pricing methods successful?

Question

What will be an ideal response?

Answer 1

PRICE SKIMMING. With this method, a high introductory price is charged that skims the top off a market in which there is greater demand than supply. The high introductory price attracts a smaller market share but recoups costs quickly.  This strategy is successful when (1) the market is price-sensitive, (2) economies of mass production are feasible, and (3) the firm has substantial resources to sustain the short-run losses necessary to obtain penetration.

PENETRATION PRICING. With this method, a firm charges a relatively low price, hoping to reach the mass market in the early stages of the product life cycle. The low price allows the product to penetrate a large portion of the market, resulting in large market share and lower production costs.  This strategy is successful when (1) the market is price-sensitive, (2) economies of mass production are feasible, and (3) the firm has substantial resources to sustain the short-run losses necessary to obtain penetration.

STATUS QUO PRICING. With this method, price is set identical or close to that of the competition. This strategy may be used more often by small firms for survival or ease of use but ignores demand and cost.  This strategy can be successful when (1) the firm is comparatively small, and (2) the firm needs a safe route to long-term survival.