11-2 What circumstances in pricing a new product might support skimming or penetration pricing?

Answer: Skimming pricing is an effective strategy when:

(1) enough prospective customers are willing to buy the product immediately at the high initial price to make these sales profitable; (2) the high initial price will not attract competitors;

(3) lowering the price has only a minor effect on increasing the sales volume and reducing the unit costs; and (4) customers interpret the high price as signifying high quality. These four conditions are most likely to exist when the new product is protected by patents or copyrights or its uniqueness is understood and valued by consumers. The conditions favoring penetration pricing are the reverse of those supporting skimming pricing:

(1) many segments of the market are price sensitive; (2) a low initial price discourages competitors from entering the market;

and (3) unit production and marketing costs fall dramatically as production volumes increase. A firm using penetration pricing may (1) maintain the initial price for a time to gain profit lost from its low introductory level or (2) lower the price further, counting on the new volume to generate the necessary profit.