How do you use price skimming and penetration pricing to launch new products or services?

Introduction

The launch of a new product or service is an opportunity for growth for a company, but it also carries significant risk. No matter how attractive a product may be, if the pricing is incorrect, the company may miss a revenue opportunity or damage its brand value. For mid-size companies in particular, a pricing strategy that maximizes effectiveness within a limited marketing budget is required.

Two leading strategies that have received attention in this context are price skimming and penetration pricing. Both strategies are utilized at the time of market launch, but they have very different objectives and timing. Which one to choose is an extremely important decision based on your product, market characteristics, and brand position.

This article provides practical explanations of the following points for companies with sales of 1 to 10 billion yen, 50 to 300 employees, and a marketing budget of roughly 60,000 USD to 3 million USD.

By reading this article, you will gain the knowledge and criteria necessary to make strategic pricing decisions and improve your chances of making a successful first move in the marketplace when launching a new product or service. By understanding essential pricing strategies and how to apply them practically, you will be able to design pricing that will sustain your brand’s growth while building a competitive advantage.

What is price skimming?

Price skimming is a pricing strategy in which a high price is deliberately set at the launch of a new product or service, and the price is lowered in stages. At its core, price skimming is about “gaining maximum profit from the customer base that initially buys at a high price and then expanding the market base.

Why “skimming”?

The word “skimming” means “to scoop out the best of the best. In other words, the idea is to secure profits first from the customer segment that most appreciates the value of the product or service (e.g., innovators and dedicated fans), and then gradually expand to a wider audience while lowering the price. This approach is particularly suited for initial cost recovery and for promoting the brand’s sense of luxury.

When to use price skimming?

Price skimming is a pricing strategy that maximizes profits by introducing a product to the market at a high price and then gradually lowering the price. This strategy is particularly effective in certain situations. Let’s take a closer look at the types of products and situations in which price skimming should be utilized.

◇ Applicable Products and Situations
Price skimming is most likely to be effective for products that meet the following conditions

・Products and services that are unique and have few competitors
If the product has a strong differentiating factor from other companies’ products, such as a new technology, unique design, or patented product, it is possible to achieve high profits at a high price. Customers will consider purchasing even at high prices because they have few other options.
・Merchandise where brand premium is important
In luxury brands and luxury products, it is important to create a sense of “specialness” or “luxury” by initially setting a high price. This increases brand awareness and value.
・Markets where customers have low price sensitivity and are motivated to buy by a desire for ownership and scarcity
Price skimming is effective when customers strongly empathize with the value of the product and feel a desire to own it, even at a high price. For example, products that are produced in limited quantities or have a special history or tradition can be more effective when using this strategy.
★Price Elasticity Perspective
When employing price skimming, it is essential to understand “price elasticity of demand” (price elasticity). Price elasticity is an indicator of how much demand fluctuates in response to changes in price.

• Low (inelastic) price elasticity
  In markets with low (inelastic) price elasticity, there is little decrease in demand even when prices are high. This is a trend seen when there are few substitutes or when consumers value quality and brand value, which is very suitable for price skimming.

  Examples of products with low price elasticity
   

  • Prescription drugs and medical devices
    Since they are essential for treating illnesses and there are few alternatives, demand is unlikely to fall even if prices rise.
  • Luxury watches (e.g., Rolex)
    Buyers value brand value and status, and a price increase would rather increase the “premium” feel.
  • Specialized equipment for professionals
    Precision instruments for doctors, industrial robots for manufacturing industries, etc. Performance and reliability are important, and sensitivity to price is low.→ Price skimming strategies are effective in these markets, and certain customers will continue to purchase even if introduced at a higher price.
• High price elasticity (elasticity)
  In markets with high price elasticity (elasticity), successful price skimming is difficult to achieve because raising prices will result in a significant drop in demand. In this case, penetration pricing (market penetration pricing strategy) is more likely to be effective.Examples of products with high price elasticity
   
  • Everyday consumer goods (e.g., mineral water, tissues)
    There are many alternative products, and a slight price increase is enough to switch to another brand.
  • Airline ticket economy class
    There is intense price competition among multiple airlines, and consumers will switch at the slightest price difference.
  • General-purpose products in consumer electronics stores (e.g., mid-sized models of TVs and refrigerators)
    Due to similar specifications, many customers are price-sensitive, and price increases quickly lead to declining sales.→ In such a market, Penetration Pricing (market penetration pricing strategy) is more suitable than price skimming, and it is more effective to try to attract customers at lower prices.Therefore, when considering price skimming, it is important to analyze the extent to which your product is aimed at price-sensitive customers and to identify markets with low elasticity.

・When development and promotion costs need to be recouped early
When bringing a new product to market, development and promotion costs may be high. Price skimming can help a company recover these costs early and stabilize its financial position by selling at a higher price initially.

Real-world example: European market strategy by a Japanese high-end kitchen knife manufacturer.For example, a Japanese high-end kitchen knife manufacturer developed highly durable, high-precision premium kitchen knives by combining its traditional craftsmanship with advanced coating technology, and began exporting them to the European market. The initial sales price was set at several times the price of ordinary kitchen knives, and the product was sold exclusively to a customer base that valued quality and storytelling, such as cooking enthusiasts and professional chefs.

At this stage, we emphasized the rarity of the product itself, Japanese craftsmanship, and the story behind the product, and worked with high-end department stores and specialty stores to develop sales. This established the brand’s value, and even at the initial high prices, sales grew sufficiently to attract attention.

The company then expanded into the mid-priced market by introducing a standard model with adjusted materials and processes. This allowed the company to reach a wider customer base without compromising the brand’s prestige. Thus, the company’s successful initial price skimming strategy allowed it to retain the value of its brand while adjusting its price point.

Practical Benefits for the companies
Such price-skimming strategies are also very effective for mid-sized companies in efficiently utilizing their limited resources. In particular, with limited marketing budgets and production resources, companies can target customer segments with high profit potential and establish their brand while recouping their initial investment. The greatest benefit of a price-skimming strategy is the early realization of high profitability and the establishment of a premium perception of the brand. Even with a limited marketing budget, narrowing down the target audience can efficiently increase profits and further enhance brand value.Thus, the price skimming strategy works very effectively in certain commercial products and situations. In products with a high degree of uniqueness or premium appeal, an initial high price point targeted to a limited customer base is likely to accelerate the brand’s success.

When to use penetration pricing?

Penetration Pricing is the strategy of setting prices lower than usual when introducing a new product or service in order to gain consumer acceptance in a highly competitive market. This strategy is especially effective when the goal is to gain market share or brand penetration. Let’s take a closer look at the types of products and situations where penetration pricing should be utilized.

◇ Applicable Products and Situations
Penetration pricing works well for products that are suitable for the following conditions

・Markets where there is a lot of competition and price is an important selection factor.
In highly competitive markets, consumers consider price to be an important determinant, making a low-pricing strategy effective. In markets where price is a key selection factor, to stand out, it is effective to set a low initial price and penetrate the market quickly.
・Products for which gaining customer loyalty leads to long-term profitability (e.g., daily necessities, recurring purchase products).
Products that are purchased on a daily basis or that are expected to be used on a regular basis (e.g., consumables and subscription-based services) can attract customers and build long-term loyalty by setting a low initial price. Low prices make it easier for customers to try the product, leading to subsequent repeat purchases.
・Merchandise that easily conveys product value by having customers use and experience the product.
When a product or service is easy to convey its value by having customers actually use it, low prices are effective. Especially when product quality and functionality are important, it is possible to offer the product at a low price at first and then shift to a higher price range as customers realize its value.
・When economies of scale can compress costs as sales volume increases.
Penetration pricing is very effective when higher sales volume lowers cost per unit. By expanding market share and increasing production scale, cost reduction can be achieved more efficiently.

Actual example: Shiseido’s “TSUBAKI” China entry strategy
For example, Shiseido adopted a penetration pricing strategy when developing its TSUBAKI hair care brand in the Chinese market. Since there were already many competing brands in the Chinese market, Shiseido set the price low in the initial stage.
As a result, the product was introduced at a price point that consumers could easily afford, providing local consumers with an environment in which they could easily try the product. In addition, the company took advantage of rapidly growing cross-border e-commerce malls and local e-commerce platforms, and developed a marketing campaign that utilized influencers and **KOLs (Key Opinion Leaders)**. As a result, the brand was able to widely penetrate the target demographic of young women in a short period of time.
By setting the price low, consumers were able to lower the hurdle for trying the product and realize the advantages of the product. Later, after gaining a certain market share, the company introduced a premium line of products and made other improvements to increase the value of the brand, including the addition of higher-priced products, which led to increased sales.
(Reference: https://www.nikkei.com/article/DGXNASDD110A3_R11C11A1TJ0000/, https://www.nikkei.com/article/DGXNASDD140IU_U1A910C1000000/, https://toyokeizai.net/articles/-/761569?display=b, https://corp.shiseido.com/jp/news/detail.html?n=00000000003287)

Practical Benefits for Small and Medium-Sized Companies
Penetration pricing is suitable for companies with limited marketing budgets that want to take the “acquire users first, build a reputation, and then improve profitability” approach. Especially when entering foreign markets for the first time or expanding sales through digital channels, focusing on gaining market share rather than short-term profits will lead to long-term success.

Penetration pricing strategies can have a significant impact on customer acquisition and brand awareness in a short period of time. This creates the foundation for securing a certain market share and improving profitability in the next phase of the process.

Thus, penetration pricing is very effective, especially in highly competitive markets and in products that can take advantage of economies of scale. It can be a useful option, especially for smaller and mid-sized companies, as a strategy to quickly gain market share and increase brand awareness.

How to use price skimming effectively?

Price skimming is a strategy of introducing a product to the market at a high price and then gradually lowering the price. By starting at a high price, the company can maximize profits in the initial phase and later reach a broader customer base. However, to effectively use this strategy, several important points need to be addressed. Here are some ways to get the most out of price skimming.

1. Identify a clear target audience
   The first step in successful price skimming is to identify a target audience to whom you can set a high price. This target audience is the customer segment that values the uniqueness and quality of the product and is less sensitive to price. For example, these are customers who value premium and scarcity value over the purchase of high-end products with advanced technology and brand power.
   For example, it is important to target customers who accept the initial high price tag of advanced technology smartphones and luxury automobiles. These customers are highly motivated to pay for new technology, design, and exclusivity. By targeting this demographic, you can achieve higher profits in the initial phase.
2. Emphasize brand value and differentiators
   For successful price skimming, it is important that the product or service be unique compared to other competing products. You need to emphasize that the product’s quality, performance, or design differentiates it from others as the reason for the higher price. This allows customers who initially purchase at a higher price to feel that they are getting exceptional value.
   For example, a luxury watch brand or luxury brand apparel would emphasize the technological superiority and uniqueness of the design, thereby promoting a premium feel to the product. These points of differentiation increase the likelihood that consumers will be convinced by the price and make an initial purchase.
3. Focus initial marketing efforts
   In a price-skimming strategy, marketing activities in the early stages are very important. Promote your product or service to your target customer base to effectively communicate the value of your product or service. In particular, emphasize the rarity and premium nature of the product through the use of influencers, PR activities, and limited sales. For example, holding specific limited-edition events or private sales can be effective in providing a sense of specialness to customers who are willing to purchase at the initial high price. Such marketing activities can attract the attention of the target audience and reinforce the premium impression of the product.
4. Adjusting prices when the time is right
   In price skimming, a high price is initially set and then the price is lowered incrementally over time. However, it is important to carefully determine the timing and range of price reductions. The appropriate timing must be determined, as premature price reductions may damage the brand’s sense of luxury.For example, lowering the price after the product has gained some market penetration and the value of the product has been fully recognized will allow you to target a new customer base while maintaining the special feeling of your initial customer base. In addition, it is important to appeal the improved product quality and service together with the price reduction, so that customers feel a sense of “value for money.
5. Expansion of sales channels
   When utilizing price skimming, the initial sales channels and locations must be carefully chosen. In the initial phase, concentrate on high-end sales channels and stores to reach the customer base that supports the product’s higher price point. Later, when prices come down, you can broaden your sales channels to access a wider customer base. For example, a luxury branded fashion item or high-tech device could initially focus on certain premium online markets or high-end department stores, and then expand the sales channel to general retailers and online markets.

Practical Benefits for Companies
For small and medium-sized companies, a price skimming strategy can be a powerful means to recoup initial investment and maximize profits with limited resources. Particularly for companies offering high unit price products or innovative new products, higher revenues can be realized quickly by initially setting higher prices and conducting focused marketing activities to specific customer segments. They can profit from their target audience of high-end customers before the product spreads, and then lower the price to spread it throughout the market.
Thus, effective use of price skimming requires the interaction of several factors, including identification of target demographics, emphasis on brand differentiators, initial marketing focus, timing of price adjustments, and expansion of sales channels. With the right combination of these elements, price skimming can be a very effective strategy for a company.

How to use penetration pricing effectivel

Penetration Pricing is a strategy of quickly gaining market share by setting a low price for a product in the early stages, and subsequently increasing brand awareness and reputation. By setting a low price, the company aims to provide consumers with a “try-before-you-buy” opportunity and subsequently promote use of the product and gain loyalty. However, in order to effectively utilize this strategy, it is important to keep a few points in mind.

1. Make early acquisition of market share a top priority
   Penetration pricing aims to quickly penetrate the market and build competitive advantage by setting prices low. The most important goal for the success of this strategy is to gain market share quickly. Therefore, it is necessary to establish a presence earlier than competitors in the target market. Especially if you are looking to enter a new market or increase your market share in an existing market, offering your product at a low price will make it easier for consumers to try your product and quickly establish your position in the market.
2. Competitive pricing
   Penetration pricing works especially well when price is a key determinant in a competitive market. Competitive pricing must be established to make the product an attractive option for consumers. By starting out with a low price, you can quickly gain market share. It is important to be aware of the price range of the competition and set a price that gives the best value for money among them. By offering a quality product at a low price, you differentiate yourself from the competition and provide value to consumers.
3. Earn customer loyalty
   Penetration pricing aims to win over consumers with low prices in the short term, but in the long term, earning customer loyalty is key. After entering a market at a low price, the company must then promote the quality of its products and the excellence of its service to entice customers to make repeat purchases. Once a customer is acquired, especially for products that are purchased on a recurring basis (e.g., consumables, subscription-based products), the company can expect steady revenues in the future. For example, with subscription-based hair care products and consumables, it is important to attract customers with an initial low price and then encourage them to continue to purchase.
4. Leveraging increased market share to raise prices
   Penetration pricing strategies typically involve raising prices after gaining market share. After setting a low price in the initial phase and winning the market share battle with competitors, prices can be adjusted appropriately once a certain customer base has been secured. At this point, it is important to reemphasize the value and differentiating factors of the product. When raising prices, the company should offer customers added value, such as improved product quality, new features, or enhanced services. This will increase the likelihood that customers will accept the price increase and continue to purchase.
5. Leveraging sales channels and marketing strategies
   In a penetration pricing strategy, the selection of sales channels and marketing activities are important in order to increase market share through lower prices. In particular, digital channels (e.g., online stores and social network marketing) can be leveraged to effectively promote the low price strategy, leveraging social network influencers and word of mouth to increase product awareness and create an environment where consumers are more likely to try the product at a lower price. For example, you can use e-commerce sites and online malls.For example, sales promotions through e-commerce sites and online malls, as well as SNS promotions, are effective ways to penetrate the market in a short period of time.
6. Cost control and profitability
   Penetration pricing sets low prices in the initial stages, so it is important to control costs and ensure profit margins. Since low pricing may result in lower short-term profits, it is necessary to increase sales volume and take advantage of economies of scale to reduce costs. By promoting reductions in manufacturing and distribution costs, profit margins can be improved and profits secured over the long term. For example, it is important to keep costs low and maintain price competitiveness by streamlining manufacturing processes and negotiating with suppliers.

Practical Benefits for Small and Medium-Sized Enterprises
For small- and medium-sized companies, penetration pricing is a powerful strategy for leveraging limited resources to increase market share and long-term profit prospects. Particularly in competitive markets or when entering new markets, a low-pricing strategy can be a means to quickly gain market share and increase brand awareness. In addition, executing a low-price strategy using digital marketing can reach a broad consumer base while keeping costs low.

Effective use of penetration pricing requires balancing several key elements, including gaining market share, building customer loyalty, revising prices at the right time, and optimizing sales channels. This will allow for short-term sales growth and maximization of long-term profits.

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