Marketing the New Venture 219After price-insensitive segments have been skimmed, prices are gradually reduced to
include more sensitive segments. The primary advantages of this strategy are:
- It provides quick cash for reinvestment in promotion or product development.
- It allows for a market test before starting full-scale production.
- It suggests that the product is of very high quality.
The major disadvantages are:
- It requires the existence of a price-insensitive market segment.
- It can create ill will in the market. Prices are perceived as “too high” and “exploita-
tive” by those who cannot afford the product and who have to wait for the intro-
duction of the lower-cost model. This was true with the early introduction of high-
definition television. - It can attract potent competitors looking for similar high returns.
Exploiting the experience curvegives an advantage to the more experienced man-
ufacturer or service provider who is more knowledgeable and efficient. This entrepre-
neur may be able to decrease some variable costs, then take advantage of these decreas-
ing costs by “riding down the demand curve.” This means that as costs decrease, prices
are set to decrease proportionately, effectively increasing volume and expanding the mar-
ket. Thus, it is possible to maintain margins (price minus variable cost) and increase
market share. This strategy is most often employed by established companies launching
innovations like new computer chips, in durable-goods industries (where the experi-
ence-curve effect is most often noted), and in markets where the product life cycle is
long enough to ride down the curve.
The advantages of this strategy are: - It enables the firm to exploit its low cost position.
- It permits slow changes in price that do not alienate customers.
- It does not require profit objectives to be sacrificed for market share.
Its disadvantages are: - Some buyers are discouraged by high initial prices.
- Price reductions may anger buyers who bought earlier.
- The experience-curve effect must be a documented reality. If the experience curve
cost reductions do not emerge then the pricing strategy will be ineffective.
Meeting the market (competitive) pricingis simply pricing a product or service at
the same level as the competition. If this practice is generally accepted by competitors
within a segment, competition will not be based on price. Instead, firms will jockey for
dominance based on distribution, promotion, and product improvement. These forms
of competition expand the market for everyone by making the products more attractive,
easier to buy, and better known. This type of pricing is most likely to prevail when com-
petitors face each other in a number of markets and wish to avoid devastating price wars,
when costs are reasonably predictable over the entire product life cycle, and when the
market is still growing.
The major advantages of this strategy are: