How can price be used as a strategic variable to achieve specific financial goals? Under what conditions should skimming or penetration pricing be adapted as strategy?

Question

What will be an ideal response?

Answer 1

Price can be used as a strategic variable based on the financial goals such as return on investment, profit, and rapid recovery of research and product development costs. When financial criteria such as profit and maintenance of margins are the goals, the product quality and price become important aspects of the strategy. The market skimming pricing strategy is part of a deliberate attempt to reach a market segment that is willing to pay a premium price for a particular brand or for a specialized or unique product. The skimming price strategy is also appropriate in the introductory phase of the product life cycle when both production capacity and competition are limited. By deliberately setting a high price, demand is limited to innovators and early adopters, who are willing and able to pay the price. When Apple introduced iPhone, the price used was a skimming price. When the product enters the growth stage of the life cycle and competition increases, manufacturers start to cut prices. This strategy has been used widely in the consumer electronics industry. On the other hand, some companies are pursuing non-financial objectives with their pricing strategy. Price can, therefore, be used as a competitive weapon to gain or maintain market position. A market penetration pricing strategy calls for setting price levels that are low enough to quickly build market share. The first-time exporter seldom uses penetration pricing since it often means that the products may be sold at a loss for a certain length of time. Many companies, when they are not qualified for patent protection, use penetration pricing as a means of achieving market saturation before competitors copy their product.