Skimming Vs Penetration Pricing and what the author of our Mangerial Accounting Text has to say !

So, most of us don't really think it's a good idea to study Ronlad Hilton's Managerial Accounting. Same is my case. But amazingly, though I couldn't learn much from Hilton in Managerial Accounting but when searching for Pricing strategies found a very good tip by Hilton

When To Choose Which Pricing

"The decision between skimming and penetration pricing," said Hilton, "depends on the type of product and involves trade-offs of price versus volume. Skimming pricing results in much slower acceptance of a new product, but higher unit profits. Penetration pricing results in greater initial sales volume, but lower unit profits."

Skimming Pricing

It's a strategy wherein the initial price for the product is set quite high for a relatively short time after introduction. Even though sales will likely be modest with skimming, the profit margin is great. This pricing approach is most often used for high-prestige or otherwise unique products with significant cache. Once the product's appeal broadens, the price is then reduced to appeal to a greater range of consumers.

Penetration Pricing

Penetration pricing is a strategy employed by businesses introducing new goods or services into the marketplace. With this policy, the initial price of the good or service is set relatively low in hopes of "penetrating" into the marketplace quickly and securing significant market share. "This pricing approach," wrote Ronald W. Hilton in Managerial Accounting, "often is used for products that are of good quality, but do not stand out as vastly better than competing products."

Pricing Strategies (Skimming and Penetration)

Pricing is a very sensitive issue, and has to be delt with great care as if not to over price or under price your product or service. Price is the factor which will determine the partial success of your good , so it is important to set a price which would cover your costs and gives you a suitable profit provided the buyer is willing to pay that price.
If you've got a unique product then the best thing to do is to use 'Market-skimming Price'. i.e setting a higher price in order to generate more revenue, however there are certain conditions when this can be used. firstly, the product's quality and image must support its higher price and secondly your costs of producing less of the good shouldn't be high otherwise it would not be profitable. A very good local example would be of about 4 years back when broadband Internet was new and most people had Dial up then, companies like Nexlinx, Worldcall, Micronet, and other ISPs were charging quite a high price for Broadband services, charging you extra for Modem and instalation and the monthly costs were quite high as well. So these companies profited quite well at the time. However when PTCL launched its Broadband back in June 2006 things changed a lot. As PTCL is a very big company, they were able to sell their service at a lower price, and thus they used 'Market-Penetration pricing' aand set their price at almost half to what the other ISPs were charging, and more over they provided the modem free of cost. This brought in a lot of new customers and the existing ones switched to PTCL as well. Other ISPs realizing this tried to lower their costs as well but it was too late as PTCL had already captured the market. But, for Penetration pricing to be effective, consumers must be responsive to price changes, and your variable costs should fall when Volume increases, and the low price has to be maintained for quite a period in order to make customers loyal. PTCL managed to do this, they are still carrying on with their low prices plus continuously giving you more value as competition increases so as to keep up with the market and to have that competitive edge over their competitors.