Price Skimming
Price skimming is a price-setting strategy which means a firm sets the highest starting price that people pay and then lowers it after some time. When the demand of the first customers is satisfied and competitors pop out on the market, the firm has to drop the price in order to appeal to new purchasers, the ones who care too much about prices. The name of the strategy comes from “skimming” consecutive layers of consumer segments referring to the prices lowered after a while.
Price Skimming work
Experts commonly use price skimming for a new product appearing on the market. The main task of price skimming is to collect as much profit as possible while customer demand is prominent and competitive producers have not got into the market yet.
Once these goals are achieved, the original product maker may decrease prices to interest thrifty consumers, but still being at the same level with their rivals, who produce copied products in a low quality. This step is usually taken when the high initial price is characterised with low sales amount so the seller is forced to drop the price in order to satisfy the market demands.
In contrast with this approach, the penetration pricing model is concentrated on releasing goods at a cheaper cost price with regard to taking as much market share as possible. This scheme works better with budget products like everyday goods, where price can become a crucial factor in terms of choosing the most affordable product among consumers.
Companies also use price skimming to reimburse the value of a production. Thus, skimming can be an effective strategy in the following contexts:
- There are enough potential consumers who can afford to buy the products at the highest price.
- High prices do not interest rival firms.
- The dropped price has little effect on raising sales volumes and lowering unit costs.
- The high product cost is often perceived as a sign of high quality.
When a new item comes on the market, (for example, a modernised model of household electronics), the price can affect buyers’ impression. In fact, products with higher prices usually can show better exclusivity and quality. In the future, this method can attract those first customers who are ready to spend some more for new unique items, or they probably especially value premium quality and simply can afford it. Anyway in the long term it may help the firm raise their sales due to positive customers’ reviews which are quite good for marketing campaigns.
Limits of Price Skimming
As a rule, the price skimming model is typically used for particular periods in order to allow the early user market to become saturated, however not to alienate conscious consumers in the long run. In addition, buyers can turn to cheaper competitors if the price reduction occurs too late, which will lead to a loss of sales and, most likely, to a loss of incomes.
Price skimming may also not be as useful for any further competitor goods. Purchasers may not buy a competing item at a higher cost without any prominent improvements in a comparison with the original product.
