IDEAS home Printed from https://ideas.repec.org/a/inm/ormksc/v34y2015i2p235-249.html
   My bibliography  Save this article

Skimming or Penetration? Strategic Dynamic Pricing for New Products

Author

Listed:
  • Martin Spann

    (Munich School of Management, Ludwig-Maximilians-University Munich, D-80539 Munich, Germany)

  • Marc Fischer

    (Faculty of Management, Economics and Social Sciences, University of Cologne, D-50923 Cologne, Germany; and UTS Business School, Sydney, NSW 2007, Australia)

  • Gerard J. Tellis

    (Marshall School of Business, University of Southern California, Los Angeles, California 90089)

Abstract

Current complex dynamic markets are characterized by numerous brands, each with multiple products and price points, and differentiated on a variety of product attributes plus a large number of new product introductions. This study seeks to analyze dynamic pricing paths in a highly complex branded market, consisting of 663 products under 79 brand names of digital cameras. The authors develop a method to classify dynamic pricing strategies and analyze the choice and correlates of observed pricing paths in the introduction and early growth phase of this market. The authors find that, despite numerous recommendations in the literature for skimming or penetration pricing, market pricing dominates in practice. In particular, the authors find five patterns: skimming (20% frequency), penetration (20% frequency), and three variants of market-pricing patterns (60% frequency), where new products are launched at market prices. Skimming pricing launches the new product 16% above the market price and subsequently increases the price relative to the market price. Penetration pricing launches the new product 18% below the market price and subsequently lowers the price relative to the market price. Firms exhibit a mix of these pricing paths across their portfolios. The specific pricing paths correlate with market, firm, and brand characteristics such as competitive intensity, market pioneering, brand reputation, and experience effects. The authors discuss managerial implications.

Suggested Citation

  • Martin Spann & Marc Fischer & Gerard J. Tellis, 2015. "Skimming or Penetration? Strategic Dynamic Pricing for New Products," Marketing Science, INFORMS, vol. 34(2), pages 235-249, March.
    • Handle: RePEc:inm:ormksc:v:34:y:2015:i:2:p:235-249
    DOI: 10.1287/mksc.2014.0891
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mksc.2014.0891
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mksc.2014.0891?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Jehoshua Eliashberg & Abel P. Jeuland, 1986. "The Impact of Competitive Entry in a Developing Market Upon Dynamic Pricing Strategies," Marketing Science, INFORMS, vol. 5(1), pages 20-36.
    2. Paul Ingenbleek & Marion Debruyne & Ruud T. Frambach & Theo M. M. Verhallen, 2003. "Successful New Product Pricing Practices: A Contingency Approach," Marketing Letters, Springer, vol. 14(4), pages 289-305, December.
    3. Frank M. Bass & Trichy V. Krishnan & Dipak C. Jain, 1994. "Why the Bass Model Fits without Decision Variables," Marketing Science, INFORMS, vol. 13(3), pages 203-223.
    4. Hurwitz, Mark A & Caves, Richard E, 1988. "Persuasion or Information? Promotion and the Shares of Brand Name and Generic Pharmaceuticals," Journal of Law and Economics, University of Chicago Press, vol. 31(2), pages 299-320, October.
    5. Peter N. Golder & Gerard J. Tellis, 1997. "Will It Every Fly? Modeling the Takeoff of Really New Consumer Durables," Marketing Science, INFORMS, vol. 16(3), pages 256-270.
    6. Glen L. Urban & Theresa Carter & Steven Gaskin & Zofia Mucha, 1986. "Market Share Rewards to Pioneering Brands: An Empirical Analysis and Strategic Implications," Management Science, INFORMS, vol. 32(6), pages 645-659, June.
    7. Harikesh Nair, 2007. "Intertemporal price discrimination with forward-looking consumers: Application to the US market for console video-games," Quantitative Marketing and Economics (QME), Springer, vol. 5(3), pages 239-292, September.
    8. Ariel Pakes, 2003. "A Reconsideration of Hedonic Price Indexes with an Application to PC's," American Economic Review, American Economic Association, vol. 93(5), pages 1578-1596, December.
    9. Shlomo Kalish, 1983. "Monopolist Pricing with Dynamic Demand and Production Cost," Marketing Science, INFORMS, vol. 2(2), pages 135-159.
    10. Barry L. Bayus, 1992. "The Dynamic Pricing of Next Generation Consumer Durables," Marketing Science, INFORMS, vol. 11(3), pages 251-265.
    11. Peter M. Noble & Thomas S. Gruca, 1999. "Industrial Pricing: Theory and Managerial Practice," Marketing Science, INFORMS, vol. 18(3), pages 435-454.
    12. Gurumurthy Kalyanaram & Glen L. Urban, 1992. "Dynamic Effects of the Order of Entry on Market Share, Trial Penetration, and Repeat Purchases for Frequently Purchased Consumer Goods," Marketing Science, INFORMS, vol. 11(3), pages 235-250.
    13. Peter N. Golder & Gerard J. Tellis, 2004. "Growing, Growing, Gone: Cascades, Diffusion, and Turning Points in the Product Life Cycle," Marketing Science, INFORMS, vol. 23(2), pages 207-218, December.
    14. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
    15. Peter M. Noble & Thomas S. Gruca, 1999. "Response to the Comments on “Industrial Pricing: Theory and Managerial Practice”," Marketing Science, INFORMS, vol. 18(3), pages 458-459.
    16. Trichy V. Krishnan & Frank M. Bass & Dipak C. Jain, 1999. "Optimal Pricing Strategy for New Products," Management Science, INFORMS, vol. 45(12), pages 1650-1663, December.
    17. Douglas Bowman & Hubert Gatignon, 1996. "Order of Entry as a Moderator of the Effect of the Marketing Mix on Market Share," Marketing Science, INFORMS, vol. 15(3), pages 222-242.
    18. Birger Wernerfelt, 1991. "Brand Loyalty and Market Equilibrium," Marketing Science, INFORMS, vol. 10(3), pages 229-245.
    19. Jinhong Xie & Marvin Sirbu, 1995. "Price Competition and Compatibility in the Presence of Positive Demand Externalities," Management Science, INFORMS, vol. 41(5), pages 909-926, May.
    20. Inseong Song & Pradeep Chintagunta, 2003. "A Micromodel of New Product Adoption with Heterogeneous and Forward-Looking Consumers: Application to the Digital Camera Category," Quantitative Marketing and Economics (QME), Springer, vol. 1(4), pages 371-407, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Katarzyna Maciejowska & Arkadiusz Jedrzejewski & Anna Kowalska-Pyzalska & Katarzyna Sznajd-Weron & Rafal Weron, 2015. "Two faces of word-of-mouth: Understanding the impact of social interactions on demand curves for innovative products," HSC Research Reports HSC/15/09, Hugo Steinhaus Center, Wroclaw University of Science and Technology.
    2. Bo Li & Subodha Kumar, 2022. "Managing Software‐as‐a‐Service: Pricing and operations," Production and Operations Management, Production and Operations Management Society, vol. 31(6), pages 2588-2608, June.
    3. Franz Hackl & Michael Hölzl‐Leitner & Rudolf Winter‐Ebmer & Christine Zulehner, 2021. "Successful retailer strategies in price comparison platforms," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(5), pages 1284-1305, July.
    4. Landry, Peter, 2022. "Pricing, advertising, and endogenous consideration of an “insistent” product," International Journal of Industrial Organization, Elsevier, vol. 80(C).
    5. Tchai Tavor & Limor Dina Gonen & Uriel Spiegel, 2023. "Customer Segmentation as a Revenue Generator for Profit Purposes," Mathematics, MDPI, vol. 11(21), pages 1-20, October.
    6. Di Li & Hu Wang, 2022. "Effects of retailers' free shipping promotions on manufacturers' product sales and product review ratings in multichannel retailing," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(6), pages 1912-1925, September.
    7. Prakash, David & Spann, Martin, 2022. "Dynamic pricing and reference price effects," Journal of Business Research, Elsevier, vol. 152(C), pages 300-314.
    8. Waheed Kareem Abdul, 2023. "Probing permanent price reduction strategy of manufacturer brands: pre- and post-purchase perceptions," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 22(6), pages 455-469, December.
    9. Hu Wang & Di Li & Changbin Jiang & Yuxiang Zhang, 2023. "Exploring the Interactive Relationship between Retailers’ Free Shipping Decisions and Manufacturers’ Product Sales in Digital Retailing," Sustainability, MDPI, vol. 15(17), pages 1-19, August.
    10. Franz Hackl & Michael Hölzl-Leitner & Rudolf Winter-Ebmer & Christine Zulehner, 2018. "Success of firm strategies in e-commerce," Economics working papers 2018-10, Department of Economics, Johannes Kepler University Linz, Austria.
    11. Wolfgang Neussner & Daniel Ebner & Maximilian Lackner, 2022. "Value Creation by Dynamic Pricing through Digitization and Industry-Wide Perspective," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 14(1), pages 115-115, January.
    12. Peter Seele & Claus Dierksmeier & Reto Hofstetter & Mario D. Schultz, 2021. "Mapping the Ethicality of Algorithmic Pricing: A Review of Dynamic and Personalized Pricing," Journal of Business Ethics, Springer, vol. 170(4), pages 697-719, May.
    13. Dario Dunkovi? & Antonia Petravi? Cili, 2017. "Retailer pricing strategy: diffuse coupons effects contingent on store format," Proceedings of Business and Management Conferences 5207242, International Institute of Social and Economic Sciences.
    14. Duan, Hongbo & Zhang, Gupeng & Wang, Shouyang & Fan, Ying, 2018. "Peer interaction and learning: Cross-country diffusion of solar photovoltaic technology," Journal of Business Research, Elsevier, vol. 89(C), pages 57-66.
    15. Martin Spann & Bernd Skiera, 2020. "Dynamische Preisgestaltung in der digitalisierten Welt [Dynamic Pricing in a Digitized World]," Schmalenbach Journal of Business Research, Springer, vol. 72(3), pages 321-342, September.
    16. Verdiana Giannetti & Gaia Rubera, 2020. "Innovation for and from emerging countries: a closer look at the antecedents of trickle-down and reverse innovation," Journal of the Academy of Marketing Science, Springer, vol. 48(5), pages 987-1008, September.
    17. Hu Wang & Di Li & Changbin Jiang, 2023. "Online retailers' price structure decisions in competitive markets: A structure–conduct–performance framework," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(2), pages 1125-1141, March.
    18. Mao, Zhaofang & Du, Zelin & Yuan, Ruiying & Miao, Qiqi, 2022. "Short-term or long-term cooperation between retailer and MCN? New launched products sales strategies in live streaming e-commerce," Journal of Retailing and Consumer Services, Elsevier, vol. 67(C).
    19. Chang, Dongkyu & Lee, Jong Jae, 2022. "Price skimming: Commitment and delay in bargaining with outside option," Journal of Economic Theory, Elsevier, vol. 205(C).
    20. Nicholas G. Marconi & Neal H. Hooker & Nicholas DiMarcello III, 2017. "What's in a Name? The Impact of Fair Trade Claims on Product Price," Agribusiness, John Wiley & Sons, Ltd., vol. 33(2), pages 160-174, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Koray Cosguner & P. B. (Seethu) Seetharaman, 2022. "Dynamic Pricing for New Products Using a Utility-Based Generalization of the Bass Diffusion Model," Management Science, INFORMS, vol. 68(3), pages 1904-1922, March.
    2. Hernández-Mireles, C. & Fok, D. & Franses, Ph.H.B.F., 2008. "The Triggers, Timing and Speed of New Product Price Landings," ERIM Report Series Research in Management ERS-2008-044-MKT, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    3. John Hauser & Gerard J. Tellis & Abbie Griffin, 2006. "Research on Innovation: A Review and Agenda for," Marketing Science, INFORMS, vol. 25(6), pages 687-717, 11-12.
    4. Hongmin Li, 2020. "Optimal Pricing Under Diffusion-Choice Models," Operations Research, INFORMS, vol. 68(1), pages 115-133, January.
    5. Inseong Song & Pradeep Chintagunta, 2003. "A Micromodel of New Product Adoption with Heterogeneous and Forward-Looking Consumers: Application to the Digital Camera Category," Quantitative Marketing and Economics (QME), Springer, vol. 1(4), pages 371-407, December.
    6. Wei-yu Kevin Chiang, 2012. "Supply Chain Dynamics and Channel Efficiency in Durable Product Pricing and Distribution," Manufacturing & Service Operations Management, INFORMS, vol. 14(2), pages 327-343, April.
    7. Chaab, Jafar & Zaccour, Georges, 2024. "Dynamic pricing in the presence of social externalities and reference-price effect," Omega, Elsevier, vol. 122(C).
    8. Wu, Xiang & (Yale) Gong, Yeming & Xu, Haoxuan & Chu, Chengbin & Zhang, Jinlong, 2017. "Dynamic lot-sizing models with pricing for new products," European Journal of Operational Research, Elsevier, vol. 260(1), pages 81-92.
    9. Avagyan, Vardan & Esteban-Bravo, Mercedes & Vidal-Sanz, Jose M., 2014. "Licensing radical product innovations to speed up the diffusion," European Journal of Operational Research, Elsevier, vol. 239(2), pages 542-555.
    10. Chandrasekaran, Deepa & Arts, Joep W.C. & Tellis, Gerard J. & Frambach, Ruud T., 2013. "Pricing in the international takeoff of new products," International Journal of Research in Marketing, Elsevier, vol. 30(3), pages 249-264.
    11. Peng Du & Qiushuang Chen, 2017. "Skimming or penetration: optimal pricing of new fashion products in the presence of strategic consumers," Annals of Operations Research, Springer, vol. 257(1), pages 275-295, October.
    12. Régis Chenavaz & Corina Paraschiv & Gabriel Turinici, 2017. "Dynamic Pricing of New Products in Competitive Markets: A Mean-Field Game Approach," Working Papers hal-01592958, HAL.
    13. Adam J. Mersereau & Dan Zhang, 2012. "Markdown Pricing with Unknown Fraction of Strategic Customers," Manufacturing & Service Operations Management, INFORMS, vol. 14(3), pages 355-370, July.
    14. Florian Steinbrenner & Jana Turčínková, 2021. "Industry-Specific Factors Impeding the Implementation of Value-Based Pricing," European Journal of Business Science and Technology, Mendel University in Brno, Faculty of Business and Economics, vol. 7(1), pages 27-46.
    15. Tristan Gagnon-Bartsch & Antonio Rosato, 2024. "Quality Is in the Eye of the Beholder: Taste Projection in Markets with Observational Learning," American Economic Review, American Economic Association, vol. 114(11), pages 3746-3787, November.
    16. Ruiz-Conde, Enar & Wieringa, Jaap E. & Leeflang, Peter S.H., 2014. "Competitive diffusion of new prescription drugs: The role of pharmaceutical marketing investment," Technological Forecasting and Social Change, Elsevier, vol. 88(C), pages 49-63.
    17. Li, Feng & Du, Timon C. & Wei, Ying, 2020. "Enhancing supply chain decisions with consumers’ behavioral factors: An illustration of decoy effect," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 144(C).
    18. Krishnamoorthy, Anand & Prasad, Ashutosh & Sethi, Suresh P., 2010. "Optimal pricing and advertising in a durable-good duopoly," European Journal of Operational Research, Elsevier, vol. 200(2), pages 486-497, January.
    19. Kyung-A Sun & Seoki Lee, 2024. "How do strategic pricing approaches influence franchise fee decisions?," Tourism Economics, , vol. 30(6), pages 1508-1530, September.
    20. Michelle M.H. Şeref & Janice E. Carrillo & Arda Yenipazarli, 2016. "Multi-generation pricing and timing decisions in new product development," International Journal of Production Research, Taylor & Francis Journals, vol. 54(7), pages 1919-1937, April.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormksc:v:34:y:2015:i:2:p:235-249. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.