Skimming or Penetration? Strategic Dynamic …

1 This article was downloaded by: [ ] On: 07 July 2015, At: 13:01 Publisher: Institute for Operations Research and the Management Sciences (INFORMS)INFORMS is located in Maryland, USAM arketing SciencePublication details, including instructions for authors and subscription information: or penetration ? Strategic Dynamic Pricing forNew ProductsMartin Spann, Marc Fischer, Gerard J. TellisTo cite this article:Martin Spann, Marc Fischer, Gerard J. Tellis (2015) Skimming or penetration ? Strategic Dynamic Pricing for New Science 34(2):235-249. terms and conditions of use: article may be used only for the purposes of research, teaching, and/or private study. Commercial useor systematic downloading (by robots or other automatic processes) is prohibited without explicit Publisherapproval, unless otherwise noted. For more information, contact Publisher does not warrant or guarantee the article s accuracy, completeness, merchantability, fitnessfor a particular purpose, or non-infringement.

2 Descriptions of, or references to, products or publications, orinclusion of an advertisement in this article, neither constitutes nor implies a guarantee, endorsement, orsupport of claims made of that product, publication, or 2015, INFORMSP lease scroll down for article it is on subsequent pagesINFORMS is the largest professional society in the world for professionals in the fields of operations research, managementscience, and more information on INFORMS, its publications, membership, or meetings visit 34, No. 2, March April 2015, pp. 235 249 ISSN 0732-2399 (print) ISSN 1526-548X (online) 2015 INFORMSS kimming or penetration ? Strategic DynamicPricing for New ProductsMartin SpannMunich School of Management, Ludwig-Maximilians-University Munich, D-80539 Munich, Germany, FischerFaculty of Management, Economics and Social Sciences, University of Cologne, D-50923 Cologne, Germany; andUTS Business School, Sydney, NSW 2007, Australia, J. TellisMarshall School of Business, University of Southern California, Los Angeles, California 90089, complex Dynamic markets are characterized by numerous brands, each with multiple products andprice points, and differentiated on a variety of product attributes plus a large number of new product intro-ductions.

3 This study seeks to analyze Dynamic pricing paths in a highly complex branded market, consistingof 663 products under 79 brand names of digital cameras. The authors develop a method to classify dynamicpricing strategies and analyze the choice and correlates of observed pricing paths in the introduction and earlygrowth phase of this market. The authors find that, despite numerous recommendations in the literature forskimming or penetration pricing, market pricing dominates in practice. In particular, the authors find five pat-terns: 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 prod-uct 16% above the market price and subsequently increases the price relative to the market price. Penetrationpricing launches the new product 18% below the market price and subsequently lowers the price relative tothe market price.

4 Firms exhibit a mix of these pricing paths across their portfolios. The specific pricing pathscorrelate with market, firm, and brand characteristics such as competitive intensity, market pioneering, brandreputation, and experience effects. The authors discuss managerial : price penetration ; price Skimming ; Dynamic pricing strategy; product life cycle; consumer durables;brand competitionHistory: Received: January 25, 2012; accepted: October 2, 2014; Preyas Desai served as the editor-in-chief andChristophe van den Bulte served as associate editor for this article. Published online inArticles in AdvanceDecember 18, IntroductionThe current market environment, especially for high-tech categories, is characterized by rapid introduc-tions of new products. In this environment, the pric-ing of new products is a difficult and critical taskaffecting the financial success of the product and thecompany. On one hand, if the price is set too low,a company not only gives up potential revenues butalso sets a perception of low quality for this newproduct, which can make future price increases diffi-cult (Marn et al.)

5 2003). On the other hand, a price settoo high might harm the take-off and diffusion of thenew product (Golder and Tellis 2004), limit gains fromexperience effects, hinder the product from reachingcritical mass or necessitate embarrassing price response to this perennial marketing challenge,the marketing literature has formulated two funda-mental marketing strategies,skimmingandpenetra-tionpricin g ( , Kotler and Armstrong 2012, p. 314;Monroe 2003, p. 380; Nagle et al. 2011, p. 125).A Skimming strategy involves charging a high intro-duction price, which is subsequently lowered (Dean1976). The rationale of this strategy is toskimsur-plus from customers early in the product life cycle toexploit a monopolistic position or the low price sensi-tivity of innovators ( , Dean 1976, Marn et al. 2003).A penetration strategy involves charging a low priceto rapidly reach a wide fraction of the market andinitiate word-of-mouth (WOM) (Dean 1976, Nagleet al.

6 2011, p. 127). penetration pricing is designed toenlarge market share and exploit economies of scaleor experience (Tellis 1986).The choice of the pricing strategy is particularlyimportant for high-tech products such as digital cam-eras where new products are frequently introducedand life cycles are short. Differentiation by attributesleads to a proliferation of products. Textbooks recom-mend a Skimming strategy for differentiated productswhere companies have some source of competitiveprotection ( , Kotler and Armstrong 2012, p. 314;235 Downloaded from by [ ] on 07 July 2015, at 13:01 . For personal use only, all rights reserved. Spann, Fischer, and Tellis: Strategic Dynamic Pricing for New Products236 Marketing Science 34(2), pp. 235 249, 2015 INFORMSN agle et al. 2011, p. 125) and a penetration strategyfor price-sensitive markets where new products usu-ally face strong competition soon after introduction( , Kotler and Armstrong 2012, p.

7 314; Monroe 2003,p. 380). However, the recommendations are unclearwhen both conditions prevail, such as markets differ-entiated with attributes yet with strong markets for modern consumer durables ( ,computers, mobile phones, TVs, digital cameras, etc.)present such a dilemma, , extensive attribute differ-entiation favoring a Skimming strategy concomitantwith strong competition favoring a penetration strat-egy. Moreover, popular examples support the suc-cess of either strategy. Apple s iPhone, for example,seems to follow a Skimming strategy in the highlycompetitive mobile phone market. In contrast, Lexussuccessfully used a penetration pricing strategy whenentering the premiumluxury study develops a method to classify observeddynamic pricing strategies or patterns and describesthe choice and correlates of Dynamic pricing strategiessuch as Skimming and penetration studycontains an in-depth empirical analysis of a differ-entiated competitive market.

8 Specifically, we analyzethe market for digital cameras in one major Europeancountry in its introduction and early growth data covers all 663 cameras introduced under 79brand names at the monthly level over a period offour years. This combination yields a rich panel dataset of 11,835 observations of cameras months. Thisstudy makes three contributions:First, it develops a method to identify dynamicpricing strategies such as Skimming and penetrationpricing. For this purpose we propose a model thatspecifies price as a function of product characteristicsand market , we apply this model to a real competi-tive consumer electronics market encompassing 663products under 79 brand names. We use a latent-classapproach with a priori defined classes of dynamicprice patterns to infer the strategies from the , we analyze the conditions that correlate withvarious pricing strategies. We want to understandwhich firm and market factors are associated with thechoice of Skimming , penetration , and market rest of the paper is organized as follows.

9 Sec-tions 2 4 describe the relationship to the literature, themethod, and the data, respectively. Section 5 describesthe estimation and results. Section 6 discusses theimplications and limitations of the main use the terms price pattern and price strategy speaking, we do not observe management s Strategic ex-ante plan to set the price over the life cycle of a new is rather the realization of that plan including the influences ofchanging market conditions (see, , Mintzberg 1987).2. Relationship to LiteratureThe literature on Dynamic pricing strategies is so vastand rich that a full review is beyond the scope of thispaper. Here, we highlight the relevance of the presentstudy to this rich literature. Dynamic pricing strate-gies are extensively discussed in the normative diffu-sion and product life-cycle literature, deriving optimaldynamic pricing strategies, such as Skimming or pen-etration pricing under monopoly ( , Kalish 1983,Krishnan et al.)

10 1999) or duopoly ( , Eliashberg andJeuland 1986, Xie and Sirbu 1995). Bayus (1992) andLiu (2010) analyze optimal Dynamic pricing strate-gies by combining analytical model, simulation, andempirical analysis. These studies provide valuableinsights about pricing under conditions of monopolyor studies examine empirical pricing strate-gies in oligopolistic or competitive markets at thecategory level ( , Bass et al. 1994, Parker andNeelamegham 1997). Other studies ( , Gatignonand Parker 1994, Parker and Gatignon 1996, Simon1979) analyze Dynamic pricing strategies for branddiffusion. Recently, Song and Chintagunta (2003) esti-mated a novel micromodel of new product adoptionwith heterogeneous and forward-looking calibrate their model with monthly data in amarket with three brands of digital cameras and findbrand-specific price effects that change over time, andwhich imply brand and time-specific pricing strate-gies.