Perreault−McCarthy: Basic
Marketing: A
Global−Managerial
Approach, 14/e- Pricing Objectives and
Policies
Text © The McGraw−Hill
Companies, 2002494 Chapter 17
A skimming policy usually involves a slow reduction in price over time. See
Exhibit 17-5. Note that as price is reduced, new target markets are probably being
sought. So as the price level steps down the demand curve, new Place, Product, and
Promotion policies may be needed too.
When McCaw Cellular Communications—the firm that pioneered cellular
phone service and was later bought out by AT&T—first came on the market, it
set a high price. A wireless minute cost about a $1 (with average monthly bills of
about $100). Customers also had to pay about $675 for a phone. McCaw used deal-
ers to sell the premium-priced packages mainly to companies who gave them to
their on-the-go executives and salespeople. The dealers could explain the value of
the system and get orders. For many of these customers no good substitute was
available. As other cellular providers came on the market, McCaw bought large
quantities of phones from Motorola at low cost and packaged them with a service
contract at a high discount. As the market grew, economies of scale kicked in.
McCaw did more advertising and started to sell cellular services through a variety
of retail outlets, including mass-merchandisers. These changes cut costs and helped
reach the growing number of families who were in the market for cell phone ser-
vices. Prices on phones had come down enough so that the dealer-retailers gave
away the phone with a one-year service contract. Now the competition for cellular
services is even more intense. So AT&T has continued to cut prices and is offer-
ing a variety of new services, ranging from Internet messaging and call forwarding
to unlimited calls on weekends. By 2000, a wireless minute was down to about 15
cents and monthly plans were about $40. Now AT&T is relying more heavily on
television advertising that encourages customers to call in and sign up or subscribe
at its website.
Skimming is also useful when you don’t know very much about the shape of the
demand curve. It’s sometimes safer to start with a high price that customers can
refuse and then reduce it if necessary.^14A penetration pricing policytries to sell the whole market at one low price. Such
an approach might be wise when the elite market—those willing to pay a high
price—is small. This is the case when the whole demand curve is fairly elastic. See
Exhibit 17-5. A penetration policy is even more attractive if selling larger quanti-
ties results in lower costs because of economies of scale. Penetration pricing may be
wise if the firm expects strong competition very soon after introduction.Penetration pricing—
get volume at a low
price
Marketing managers used
penetration pricing and sold a
million units of the innovative
PalmPilot within 20 months of its
introduction. Now, Palm’s
reputation for good value and a
large base of satisfied customers
help defend against formidable
new rivals, like Sony and
Handspring, who are introducing
new features.
Price moves down the
demand curve