Pricing within a Differentiated Product Strategy

A differentiated product strategy may be focused on a particular buyer segment or directed at multiple segments. In either case, the role of pricing is to collect the rewards from producing attributes that buyers find uniquely valuable. If the differentiated product strategy is focused, the firm earns its rewards by skim pricing to the segment that values the product most highly. For example, Godiva (chocolate), BMW (automobiles), and Gucci (apparel) use skim pricing to focus their differentiated product strategies. In contrast, when the differentiated product strategy is more broadly aimed at multiple segments, companies should set neutral or penetration prices and earn rewards from the sales volume that its product can then attract. Procter & Gamble (consumer packaged goods), Toyota (automobiles), and Caterpillar (construction equipment) use neutral pricing to sell their differentiated products to a large share of the market.

Penetration pricing is also possible for a differentiated product. This is common in industrial products where a company may develop a superior piece of equipment, computer software, or service, but price it no more than the competition. The price is used to lock in a large market share before competitors imitate, and therefore eliminate, the product's differential advantage. Although the Windows operating system is clearly a unique product, Microsoft used penetration pricing to ensure that its product became the dominant architecture and default standard for software application programmers. Penetration pricing is less commonly successful for differentiated consumer products, since buyers who can afford to cater to their desire for the attributes of differentiated products can often also afford to buy them without shopping for bargains.

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