Q.Explain price skimming and penetration pricing. In what circumstances would a firm choose each for a newly launched product?

Skimming and penetration are opposite launch strategies — one starts high, the other low — each suited to a different kind of market.

Price skimming launches a new product at a deliberately high price to "skim" the greatest revenue from those buyers willing to pay most (early adopters), after which the price is lowered in stages to reach successive layers of the market. It suits a novel product with few close substitutes, where early demand is relatively inelastic, where the firm wants to recover heavy research-and-development cost quickly, and where a high price signals quality or exclusivity — for example, a newly launched high-technology gadget.

Penetration pricing launches at a deliberately low price to enter the market rapidly, capture a large market share and discourage rivals from entering, relying on high sales volume and later economies of scale to earn profit. It suits a price-sensitive mass market where demand is elastic, where the product has close substitutes, and where large-scale production lowers unit cost. …

Reversing the two definitions. Saying penetration means charging a high price to 'penetrate premium buyers' — penetration is a low-price strategy. Ignoring the d …