A somewhat different pricing situation relates to new product pricing. With a totally new product, competition does not exist or is minimal. What price level should be set in such cases? Two general strategies are most common: penetration and skimming. Penetration pricing in the introductory stage of a new product's life cycle means accepting a lower profit margin and to price relatively low. Such a strategy should generate greater sales and establish the new product in the market more quickly. Price skimming involves the top part of the demand curve. Price is set relatively high to generate a high profit margin and sales are limited to those buyers willing to pay a premium to get the new product (see Exhibit 30).
|Newsline: The risk of free PCs|
There is no such thing as a free PC. However, judging from the current flood of offers for free or deeply discounted computers, you might think that the laws of economics and common sense have been repealed. In fact, all of those deals come with significant strings attached and require close examination. Some are simply losers. Others can provide substantial savings, but only for the right customers.
The offers come in two categories. In one type, consumers get a free computer along with free Internet access, but have to accept a constant stream of advertising on the screen In the other category, the customer gets a free or deeply discounted PC in exchange for a long-term contract for paid Internet services.
Most of these are attractive deals, but the up-front commitment to USD 700 or more worth of Internet service means they are not for everyone. One group that will find little value in the arrangement is college students, since nearly all schools provide free and often high-speed Net access. Others who could well end up losing from these deals are the lightest and heaviest users of the Internet. People who want Internet access only to read e-mail and do a little light Web browsing would likely do better to buy an inexpensive computer and sign up for a USD 10-per-month limited-access account with a service provider.
People who use the Internet a lot may also be poor candidates. That is because three years is a long commitment at a time when Internet access technology is changing rapidly. Heavy users are likely to be the earliest adopters of high-speed cable or digital subscriber line service as it becomes available in their areas.
Which strategy is best depends on a number of factors. A penetration strategy would generally be supported by the following conditions: price-sensitive consumers, opportunity to keep costs low, the anticipation of quick market entry by competitors, a high likelihood for rapid acceptance by potential buyers, and an adequate resource base for the firm to meet the new demand and sales.
A skimming strategy is most appropriate when the opposite conditions exist. A premium product generally supports a skimming strategy. In this case, "premium" does not just denote high cost of production and materials; it also suggests that the product may be rare or that the demand is unusually high. An example would be a USD 500 ticket for the World Series or an USD 80,000 price tag for a limited-production sports car. Having legal protection via a patent or copyright may also allow for an excessively high price. Intel and their Pentium chip possessed this advantage for a long period of time. In most cases, the initial high price is gradually reduced to match new competition and allow new customers access to the product.
1. Sources: Stephen H. Weldstrom. " High Cost of Free PCs." Business Week, September 13, 1999. p. 20; Steven Bruel. "Why Talk's Cheap," Business Week, September 13. 1999, pp. 34-36; Mercedes M. Cardona and Jack Neff, " thing's at a Premium," Advertising Age, August 2. 1999, pp. 12-13.