Page 174 - Cambridge IGCSE Business Studies

Cambridge IGCSE Business Studies Section 3 Marketing

Market skimming
A business may decide to set a high price for a new product which is unique or very
different from anything on the market. This is known as market skimming. For

example, when Google introduced their Google glasses, they were able to charge
a very high price because it is a unique product and consumers are willing to pay
more for the very latest technology. Consumers may also want the status of owning
the latest version of a product and are prepared to pay a high price for this.

The development of new medicines also attracts skimming pricing. Th e
companies who develop these new medicines are given legal protection from any
other company copying their product for a certain period of time. During this time
they are able to charge a very high price for the product they will have spent many
Businesses can charge more for millions of dollars researching and developing.
the latest technology Th e profit earned when using market skimming is very high. Businesses

sometimes need a large profit to get back the high costs of research and

development of the product.
KEY TERMS
Market skimming: setting a Penetration pricing

high price for a new product that Penetration pricing is also used for new products. The price is set at a lower
is unique or very diff erent from level from similar products already on the market. The low price may encourage

any other product on the market.
consumers to try the product. Once the business has built up some customer loyalty
Penetration pricing: setting a
for the product it usually increases the price to a level similar to that of its main
low price to attract customers to competitors.
buy a new product.
Competitive pricing: setting Competitive pricing
172 a price similar to that of In many markets the level of competition is very high and firms selling in

competitors’ products which are

these markets will often charge similar prices to each other. This is because

already established in the market.
the products are often very similar with no strong brand advantage for any

producers. If a business was to charge a higher price than its competitors it is
likely that consumers will not buy their product because they can get similar
for cheaper.
Competitive pricing is used for pricing both new and existing products.
■ If a business has a good brand image and loyal customers, then it may use
competitive pricing when launching new products which are similar to those
already on the market. This is because consumers will believe the product to be of
the same high quality as the firms other products.
■ Products that were introduced to the market using market skimming or
penetration pricing methods will need a different method of pricing because

eventually competitors will enter the market with similar products. The greater
the competition in a market the lower prices will be. They may be priced using
competitive pricing.

KEY TERM Some industries are dominated by large companies. These companies will set the

market price for their products. Smaller firms, producing similar products, will fi nd
Price leadership: smaller firms

it very difficult to set a price that is very different to that of the market leader. Th is

set their price based on the price is sometimes called price leadership.
set by the dominant firm in the
industry.
Promotional pricing
There are several methods of promotional pricing. They are used for diff erent

reasons but all involve pricing the product as low as possible for a limited period to
get consumers to buy.