Answer – Pricing Strategies

Pricing strategies ladder from penetration to premium skimming pricing

New-Product Pricing: Skimming or Penetration?

Kotler and Armstrong (2018) set out two opposite strategies for pricing a genuinely new product. Market-skimming pricing sets a high initial price to earn strong margins from customers willing to pay for novelty and quality, then lowers price gradually. Market-penetration pricing does the opposite: a low initial price is used to build volume and market share quickly, on the assumption that costs will fall as volume grows.

Applying It to Colorado Ricardo

Worked example

Colorado Ricardo cannot win a price war against mass-produced e-bikes – that has never been its story, and the standard bike already operates on a thin 4.2% margin, so repeating a low-price strategy at a higher $1,800 cost base would be even riskier. A skimming-style launch price of around $2,999 keeps the bike positioned alongside, not below, the brand’s existing premium story, while still giving a healthy per-unit contribution of roughly $1,199 above variable cost to help cover the tooling and marketing investment the launch requires. Price can always be lowered later once volume is established; raising a price that started too low is far harder.

Other Pricing Tactics Worth Considering

Psychological pricing ($2,999 rather than $3,000) makes the price feel meaningfully lower without changing the margin. Product line pricing could also be used for accessories – for example, offering the upgraded battery as an optional extra rather than bundling it into the base price, so budget-conscious customers still have an entry point into the range.

Key point

Kotler and Armstrong (2018) note that a price should be set to match the value the target segment perceives, not simply to cover cost or match competitors. For a premium, low-volume brand like Colorado Ricardo, a skimming-style launch price protects the story that has always justified charging more than a mass-market rival.

Pricing decisions should be checked against the underlying cost structure – see the Contribution Analysis exercise – and against how the product is positioned for its target segment, in the Positioning exercise.