New study finds most firms do not use skimming or penetration pricing for new products

CATONSVILLE, MD, March 20, 2015 - A new study finds that most firms do not use a Skimming or Penetration Strategy to price new products. The study will be published in Marketing Science, and is titled, “Skimming or Penetration? Strategic Dynamic Pricing for New Products”. The research was conducted by Martin Spann, professor at Ludwig-Maximilians-University Munich (Germany), Marc Fischer, professor at the University of Cologne (Germany) and the University of Technology Sydney (Australia), and Gerard J. Tellis, professor at the Marshall School of Business, University of Southern California.

Strategists have long recommended that marketers use either a skimming or a penetration strategy for pricing new products. A skimming strategy involves charging a price much above costs in order to exploit demand for the new product that offers improvements in quality or features. “This strategy basically attempts to skim consumer surplus” says Professor Spann. On the other hand, penetration strategy involves selling at a low price, even below costs, in order to gain a large chunk of the market and achieve economies of scale. “This strategy sells low on the hope of driving down costs and reaping a profit in the future,” says Professor Fischer. Marketers had long assumed that firms adopted either one of these two strategies for pricing new products.

In contrast, the authors find that manufacturers of digital cameras adopt penetration and skimming strategies, for roughly a small 20% of new products. However, for 60% of new products, firms use a straightforward competitive or market pricing strategy. The authors obtained these results from an analysis of dynamic pricing strategies in a highly complex branded market, consisting of 663 products under 79 brand names of digital cameras in a large European country. They developed a method to classify dynamic pricing strategies and analyze the choice and correlates of observed pricing paths in the introduction and early growth phase of this market. Professor Tellis explains, “Market conditions are so restrictive that they limit strategic pricing. Some competitors would undercut the Skimming Price limiting margins while others would match the penetration price preventing economies of scale.” Thus despite experts’ recommendations, skimming or penetration are not practiced much.

The authors find that firms exhibit various dynamic pricing strategies simultaneously over a portfolio of products. . The choice of strategy is associated with market, firm, and brand characteristics. “Market-pricing and penetration strategies occur more often after the takeoff of the market and under increased competitive intensity,” says author Marc Fischer.
“Market pricing is also more likely to be adopted by late entrants, whereas firms that have established a reputation in the market rather adopt a skimming strategy. Penetration strategies occur more often if firms have larger cumulated sales,” says author Gerard Tellis.

The authors conclude that firms seem to follow a portfolio approach in their choice of pricing strategy, with various products in their product line launched at various times and probably targeted at various consumer segments. “In this case, the application of penetration pricing for some products can exploit economies of scale and experience that may cross-subsidize costs for the skimming strategy for other products,” adds Martin Spann. “Related, price skimming for some products exploits margin that can complement the low margin from price penetration for other products.”

Marketing managers in other markets can apply the method developed in this study to analyze the prevalence and use of pricing strategies in their respective market. They only need to adapt variables such as product features to the specific characteristics of their market.
The authors of the study are members of ISMS, INFORMS Society for Marketing Science. ISMS is a group of scholars focused on describing, explaining, and predicting market phenomena at the interface of firms and consumers.

The author of the study is a member of ISMS, the INFORMS Society for Marketing Science. ISMS is a group of scholars focused on describing, explaining, and predicting market phenomena at the interface of firms and consumers. This press release was prepared by the authors.

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About the Authors

	Martin Spann Munich School of Management Ludwig-Maximilians-University Munich, D-80539 Munich, Germany [email protected]
	Marc Fischer Faculty of Management Economics and Social Sciences University of Cologne D-50923 Cologne, Germany; and UTS Business School Sydney, NSW 2007, Australia [email protected]
	Gerard J. Tellis Marshall School of Business University of Southern California Los Angeles, California 90089 [email protected]

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ISMS is a group of scholars focused on describing, explaining, and predicting market phenomena at the interface of firms and consumers.

Peter T.L. Popkowski Leszczyc, Ph.D.,
V.P. of Electronic Communications Informs Society for Marketing Science

Director CampusAuctionMarket.com and Professor of Marketing
University of Alberta, 4-20 F School of Business
Edmonton, AB, Canada, T6G 2R6,
and Professor of Marketing Renmin University, Beijing, China

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