This is “Pricing and Product Differentiation Strategies”, section 4.12 from the book Creating Services and Products (v. 1.0).
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Pricing plays a key role in developing and formulating a market strategy. The use of PD curves in developing products and services incorporates several important pricing and product strategies.Jain (2000). Modern businesses often turn to product-line pricing strategy to offer a number of products with differences in quality, design, size, and style in order to maximize profits. The product portfolio can include products that are complementary and even products that compete with each other.
The use of PD curves is also in line with the two major pricing strategies for marketing new products: skimming pricing and penetration pricing. Skimming pricingA strategy of entering the market with a high initial price to attract the high end of the demand curve, where price elasticity is low. is used to tap into the so-called “cream of the market.” It is an attempt to attract the high end of the demand curve where price elasticity is low. That is, the customers are not price-sensitive. The objective of using this strategy is to facilitate profitability with a slowly maturing innovative product, covering the high cost of R&D. In many instances, marketers introduce the high end first and then go for the mass market by lowering prices. Penetration pricingA strategy of entering the market with a low initial price to capture a large share of the marketplace. is a strategy of entering the market with a low initial price in order to capture a large share of the marketplace. One objective of this strategy is to tap into the demand curve where the price elasticity is high and customers are price-sensitive. It is used to lure customers, get at a large mass Atlas market, discourage competition, and build economies of scale.Shapiro and Varian (1998).