International Pricing Strategies: Skimming Pricing, Penetration Pricing, Predatory Pricing

24th November 2021 0 By indiafreenotes

Pricing is one of the most relevant elements of the marketing mix. Price is defined as the amount of money required for a product or service. Generally, this should reflect the cost of producing the product, the cost of providing any necessary or ancillary services, a return for the firm, as well as the quality of the product.

Skimming Pricing

Under high pricing policy, higher prices are charged during the initial stage of the introduction of a new product. The manufacturer fixes, higher price of his product in order to recover his initial investment quickly. This type of pricing is resorted to by an exporter who has gained a strong foothold (a near monopoly position), in a foreign market and has acquired a highly competitive position with an image of a dependable supplier of quality product.

With the help of a well thought out promotion program, emphasizing the value derivable from the product, higher price may be charged to maximize gain. Vanity items or items that involve high research development expenditure for manufacturing and marketing or items that are unique to a particular company or country which cannot be easily copied by competitors are amenable to skimming pricing.

Producers of smart phones used a skimming strategy. Once other producers penetrated into the market and the smart phones were manufactured at a lower unit price, other marketing approaches and pricing approaches were executed. New products were launched and the market for smart phones earned a reputation for innovation.

Penetration Pricing

Under this pricing policy, prices are fixed below the competitive level to obtain a larger share of the market and to develop popularity of the brand. Unlike skimming price policy, it facilitates higher volume of sales even during the initial stages of a product’s life cycles. This policy helps in developing the brand preference and is useful in marketing the products which are expected to have a steady long-term market.

Penetration pricing is an aggressive pricing strategy which results in lower profits or even losses during the initial stages. But once the product is established in the market, profit level goes up because of economies of large scale production.

After getting large number of subscribers, rates gradually go up. For example, Tata Sky or any cable or satellite company, when there is a premium movie or sporting event rates are at their highest. Thus, they shift from penetration strategy to more of a skimming or premium pricing strategy.

Predatory Pricing

Predatory pricing is a pricing strategy, using the method of undercutting on a larger scale, where a dominant firm in an industry will deliberately reduce its prices of a product or service to loss-making levels in the short-term. The aim is that existing or potential competitors within the industry will be forced to leave the market, as they will be unable to effectively compete with the dominant firm without making a loss. Once competition has been eliminated, the dominant firm now with having a majority share of the market can then raise their prices to monopoly levels in the long-term to recoup their losses.

The difference between predatory pricing and competitive pricing is during the recouping phase of lost profits by the dominant firm charging higher prices. With there being fewer firms in the market causing consumers to have fewer choices between these products or services these higher prices result in consumer harm. Predatory pricing usually will cause consumer harm and is considered anti-competitive in many jurisdictions making the practice illegal under some competition laws.

Here, the rates of marketing and advertising a product are kept as low as possible. Supermarkets often have economy brands for soups, spaghetti, biscuits, etc.

Budget airlines are popular for keeping their overheads as low as possible and then providing the customer a comparative lower rate to fill an aircraft. The first few seats are sold at a very low rate almost an advertisement rate price and the middle majority are economy seats, with the highest rate being sold for the last few seats on a flight i.e., in the premium pricing strategy. During times of recession, economy pricing records more purchase.

Legal features

  • The principal part of predatory pricing is the operator in the seller’s market, and the operator has certain economic or technical strength. This feature distinguishes it from price discrimination, which includes not only competition between sellers but also competition among buyers.
  • The geographical market of predatory pricing is the country’s domestic market. This feature distinguishes it from “dumping“. “Dumping” refers to the act of selling commodities in overseas markets at a lower price than the domestic market. It can be seen that these two have similarities in terms of “low-cost sales” and “exhaustion of competitors”, but their differences are obvious.

(1) The scopes of application of the two are different. “Predatory pricing” applies to domestic trade, and “dumping” applies to international trade. The standards for the identification of the two are different. “Predatory pricing” is based on cost, while “dumping” is based on the price applicable to the normal trading of domestic similar products.

(3) The laws applicable to both are different. “Predatory pricing” mainly applies to domestic laws, while “dumping” mainly applies to international treaties or the laws of other countries.

(4) The consequences of the two are different. Legal sanctions on “predatory pricing” are compensating damages or administrative penalties, while “dumping” is levying anti-dumping duties.

The objective performance of predatory pricing is a company temporarily sells goods or services below cost. Its essence is that it temporarily loses money, but squeezes competitors out of a certain market to form an exclusive situation. Then the predatory pricing company can sell goods and services at monopoly prices to make up for the losses from its low price sales.

A dominant firm’s subjective intention may be to eliminate competition to gain a monopoly advantage. Under EU law, if a dominant firm prices above AVC but below average total costs (ATC), proving intention can be useful evidence for a finding of predatory pricing. However, it can be difficult to distinguish an intention to eliminate competitors from a legitimate intention to win competition. Therefore, the European Commission do not have to establish an undertaking’s subjective intention to show Article 102 applies, especially as abuse is an “objective” rather than a subjective concept.