Basic Marketing: A Global Managerial Approach

Perreault−McCarthy: Basic
Marketing: A
Global−Managerial
Approach, 14/e

17. Pricing Objectives and
    Policies

Text © The McGraw−Hill

Companies, 2002

Pricing Objectives and Policies 493

When marketing managers administer prices, as most do, they must consciously

set a price-level policy. As they enter the market, they have to set introductory

prices that may have long-run effects. They must consider where the product life

cycle is and how fast it’s moving. And they must decide if their prices should be

above, below, or somewhere in between relative to the market.

Let’s look for a moment at a new product in the market introduction stage of

its product life cycle. There are few (or no) direct substitute marketing mixes. So

the price-level decision should focus first on the nature of market demand. A high

price may lead to higher profit from each sale but also to fewer units sold. A lower

price might appeal to more potential customers. With this in mind, should the firm

set a high or low price?

A skimming price policytries to sell the top (skim the cream) of a market—the

top of the demand curve—at a high price before aiming at more price-sensitive cus-

tomers. A skimming policy is more attractive if demand is quite inelastic—at least

at the upper price ranges.

Skimming may maximize profits in the market introduction stage for an innova-

tion, especially if there is little competition. Competitor analysis may help clarify

whether barriers will prevent or discourage competitors from entering.

Some critics argue that firms should not try to maximize profits by using a skim-

ming policy on new products that have important social consequences. A

patent-protected, life-saving drug or a genetic technique that increases crop yields,

for example, is likely to have an inelastic demand curve. Yet many of those who

need the product may not have the money to buy it. This is a serious concern. How-

ever, it’s also a serious problem if firms don’t have any incentive to take the risks

required to develop breakthroughs in the first place.^13

Skimming pricing—

feeling out demand at a

high price

Skimming has critics

Price-Level Policies—Over the Product Life Cycle

Quantity

Initial

skimming

price

Second

price

Final

price

Price “Skim the cream” pricing

Firm tries to sell

at a high price

before aiming at

more price-

sensitive

consumers

Quantity

Penetration

price

Price Penetration pricing

Firm tries to sell the

whole market at one

low price

Exhibit 17-5 Alternative Introductory Pricing Policies