Pricing Case

Fall2013 Essay for Test 2

By:

Question: Is penetration pricing more likely than skim pricing to raise a company's or a business unit's operating profit in the long run? Give two real world examples of companies that pursue this strategy, and whether it has or has not succeeded.

Answer: I believe that penetration pricing is more likely to raise a company's or business units operating profit in the long run. Skim pricing offers the opportunity for business to "skim the cream" from the top of the demand curve with a high price while the product is novel and competitors are few. I believe that skim pricing is more of a short term option for profit rather than long because you are basically skimming from the top of the customers. However, this is a higher risk and when it comes to skimming from the top it could turn the customers away and effecting not an increase in operating profit in the long run.

On the other hand penetration pricing attempts to hasten market development and offer the pioneer the opportunity to use the experience curve to gain market share with low price and then dominate the industry. This may not result in short term financial gains right away, but once a company starts to take over the market share with their lower price compared to competitors then in the long run it will result in higher operating profits.

The best example of a company that uses pricing penetration would be Wal- Mart. Wal Mart is the biggest company that uses pricing penetration and has been from the beginning, which is what has allowed them to become so successful. It all started with the rolling back prices and undermining all of their competitors such as K-Mart and eventually putting multiple retail stores, grocery stores and etc. out of business due to their pricing penetration.

Essentially Wal Mart would gather all of the vendors that they could sit them in a room and have them hash it out. The way that they would do that is by saying that they want product x and x amount of price. The x amount of price was very low that no vendor could afford to give to any other company besides Wal Mart because they would offer to buy in bulks of millions making a very high profit for the winning vendor as much. It basically turned to multiple vendors fighting over for the business of Wal Mart. This vision came from the creator of Wal Mart Sam Walton who always was trying to find a way to make everything more convenient and at a reasonable price for consumers and he did this through multiple departments within one store and the price penetration method.

Even though pricing penetration seems that it could work and be great for every company that is not the case if it is not used properly. Another company that uses pricing penetration that was not used as properly as it could have been would be Netflix. Netflix started out with 1 of 3