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Q: Under what conditions would a camera manufacturer adopt a skimming price approach for a new product? A penetration pricing strategy?
A: Market-Skimming Pricing Many companies that invent new products initially set high prices to "skim" revenues layer by layer from the market. Intel is a prime user of this strategy, called market-skimming pricing. [ One analyst describes Intel's pricing strategy this way: "The chip giant introduces a new, higher-margin microprocessor every 12 months and sends older models down the food chain to
feed demand at lower price points." When Intel first introduces a new computer chip, it charges as much as $1,000 for each chip, a price that makes it just worthwhile for some segments of the market to adopt computers containing the chip. The new chips power top-of-the-line PCs and servers purchased by customers who just can't wait. As initial sales slow down, and as competitors threaten to introduce similar chips, Intel lowers the price to draw in the next price-sensitive layer of customers. Prices eventually bottom out at less than $200 per chip, making the chip a hot mass-market processor. In this way, Intel skims a maximum amount of revenue from the various segments of the market. Market skimming makes sense only under certain conditions. First, the product's quality and image must support its higher price, and enough buyers must want the product at that price. Second, the costs of producing a smaller volume cannot be so high that they cancel the advantage of charging more. Finally, competitors should not be able to enter the market easily and undercut the high price. -TOP- Market-Penetration Pricing Rather than setting a high initial price to skim off small but profitable market segments, some companies use market-penetration pricing. They set a low initial price in order to penetrate the market quickly and deeply?to attract a large number of buyers quickly and win a large market share. The high sales volume results in falling costs, allowing the company to cut its price even further. For example, Dell used penetration pricing to enter the personal computer market, selling high-quality computer products through lower-cost direct channels. Its sales soared when IBM, Compaq, Apple, and other competitors selling through retail stores could not match its prices. ]
kitchencatlover|Points 162|
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Asked 8/22/2012 11:44:54 PM
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