This is the second article on strategic pricing, you can find the first article here. There I discussed cost pricing and competitive pricing for the medical device sector.
Today, I will cover two other pricing strategies, skimming and penetration analyzing their pros and cons. It’s an insightful read, so follow along.
Skimming pricing strategy
The decision between skimming or penetration pricing is based on several factors such as the level of competition, company characteristics, market dynamics, degree of innovation, etc.
Medical device companies use skimming pricing when the objective is to serve a segment of the market that is relatively price-insensitive and thus willing to pay a premium price for the product or service received.
For example, skimming is used if the supply of the product is limited in order to maximize revenue and match demand for supply.
When a company is the first and only seller of an innovative product, a skimming price may be used to maximize profits until competition arrives and forces the company to lower the price.
Skimming is often used in markets, typically developing countries, with two very different income levels, the wealthy and the poor. The two groups have different access to the healthcare system and costs prohibit setting a price that will be attractive to the lower-income market normally provided by the public system.
So, the company charges a premium price and directs the product to the high-income, relatively price-insensitive segment which is normally served by the private healthcare providers.
Often the existence of a large underserved low-end market attracts other companies (frequently local companies) that can develop value segment products that could match the lower price level.
The typical risk of price skimming is the early entry of cheaper me-too products that will erode the profitability.
However, with the skimming price strategy, there is another concrete risk. At the launch, it is critical to demonstrate the value of the high-priced new product to the customers and to clearly identify the early adopters.
Penetration pricing strategy
Applying penetration pricing means stimulating sales growth by deliberately offering products at a lower price.
Penetration pricing most often is used to acquire and hold market share as a competitive maneuver.
For example, in a segment with numerous similar products and customers sensitive to price, a significantly lower price can help product adoption by motivating customers to switch brands and build demand for your product.
As a result, that increase in volume may bring economies of scale and reduce your unit cost.
In markets experiencing rapid and sustained growth, for example, thanks to the access to the healthcare system of a large part of the population becoming part of the middle class, penetration pricing may be used to stimulate market growth even with limited competition.
Penetration pricing may be a more profitable strategy than skimming if it maximizes revenues as a base for fighting the soon-coming competition.
Medical device companies may decide on a penetration pricing strategy to establish a technology standard.
A typical example is the capital/disposable business model, where the capital equipment is offered at a very low price to facilitate the penetration of the technology and the disposables are much higher as in the razor/blade business model.
Penetration pricing brings the risk of targeting only price-sensitive customers normally less prone to loyalty and that can have unsustainable expectations about price.
Likewise, penetration pricing may start a price war with the competitors and if badly managed can be not sustainable and may reduce the profitability of the business.
Conclusion
Although skimming and penetration pricing strategies are important, as a marketer I consider that the price of the product should be related to the value for the customer.
In the next post I will cover the value pricing strategy. Until then, please feel free to let me know your thoughts about these pricing strategies in the space below. If you enjoyed this post, share it with friends and suggest they subscribe or follow me on LinkedIn.