When Introducing New Products,some Companies Use Price Skimming Whereas Others

question 41

Essay

When introducing new products,some companies use price skimming whereas others use penetration pricing.
Required:
A.Distinguish between price skimming and penetration pricing.
A.Price skimming is designed to obtain a high price per unit at relatively low levels of sales.As the product becomes known and interest in it grows,the price is lowered,thus stimulating sales volume.Penetration pricing,on the other hand,seeks to generate a relatively high level of sales initially in order to achieve a high market share.Such penetration is accomplished through an initial price that is relatively low.
B.Is price skimming a viable alternative for most new products? Explain.
B.Price skimming is probably not viable for most products.The skimming strategy requires a small core of customers for whom price is unimportant compared to other characteristics of the product-which might be the case with wealthy buyers and/or luxury goods.These customers are willing to pay just about any price to secure the product.

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Definitions:

Direct Materials

Materials that can be directly associated with the production of specific goods, integral to their manufacturing.

Controller's Staff

Pertains to the team of accounting professionals supervised by the controller, responsible for managing a company’s financial and accounting functions.

Management Accountants

Professionals who prepare financial information for internal use by the management, aiding in decision-making processes.

Shareholder Relations

The management of interactions and communications between a corporation and its shareholders.