Price Skimming

What Is Price Skimming?

Price skimming is a product pricing strategy by which a firm charges the highest initial price that customers will pay and afterward brings down it over the long run. As the demand of the main customers is fulfilled and competition enters the market, the firm brings the price down to draw in another, more price-delicate segment of the population. The skimming strategy gets its name from "skimming" successive layers of cream, or customer segments, as prices are brought down over the long haul.

How Price Skimming Works

Price skimming is often utilized when another type of product enters the market. The goal is to gather as much revenue as conceivable while consumer demand is high and competition has not entered the market.

When those goals are met, the original product maker can bring down prices to draw in additional cost-cognizant buyers while staying competitive toward any cheaper copycat things entering the market. This stage generally happens when sales volume starts to diminish at the highest price the seller can charge, compelling them to bring down the price to satisfy market need.

Skimming can empower the entry of contenders since different firms will notice the falsely high edges available in the product, they will rapidly enter.

This approach stands out from the penetration pricing model, which centers around delivering a lower-priced product to get however much market share as could be expected. Generally, this technique is more qualified for cheaper things, for example, essential household supplies, where price might be a driving factor in many customers' production determinations.

Firms often use skimming to recuperate the cost of development. Skimming is a valuable strategy in the following settings:

• There are an adequate number of prospective customers able to buy the product at a high price.
• The high price doesn't draw in contenders.
• Bringing down the price would meaningfully affect expanding sales volume and decreasing unit costs.
• The high price is deciphered as an indication of high quality.

At the point when another product enters the market, for example, another form of home technology, the price can influence buyer discernment. Often, things priced towards the higher end propose quality and restrictiveness. This might assist with drawing in early adopters who will spend something else for a product and can likewise give valuable word-of-mouth marketing efforts.

Price Skimming Limits

Generally, the price skimming model is best utilized for a short period of time, permitting the early adopter market to become soaked, yet not estranging price-cognizant buyers over the long term. Furthermore, buyers might go to less expensive contenders in the event that a price reduction comes about too late, leading to lost sales and probably lost revenue.

Price skimming may likewise not be as effective for any contender follow-up products. Since the initial market of early adopters has been tapped, different buyers may not purchase a contending product at a higher price without critical product improvements over the original.

Highlights

• This approach diverges from the penetration pricing model, which centers around delivering a lower-priced product to snatch however much market share as could be expected.
• Price skimming is a product pricing strategy by which a firm charges the highest initial price that customers will pay and afterward brings down it over the long haul.
• As the demand of the primary customers is fulfilled and competition enters the market, the firm brings the price down to draw in another, more price-delicate segment of the population.