High profitability: It generates a high profit margin for the company.Cost recuperation: It helps a firm quickly recover its costs of development.Perceived quality: Price skimming helps build a high-quality image and perception of the product.
The company generates total revenue of A + B + C, with total sales of Q2. With their follow-on pricing, the company generates additional revenue = C with sales of Q2-Q1. In the price skimming strategy above, Company A generates revenue = A + B with sales of Q1. After satisfying demand at P1, the company sets a follow-on price at P2 to capture price-sensitive customers and to put pricing pressure on competitors that enter the market. Company A follows a price skimming strategy and sets a skim price at P1 to recover its research and development cost. Illustration and Example of Price SkimmingĬompany A is a phone manufacturing company that recently developed a new proprietary technology for its phones. As the demand from these two consumer segments fills up, the price of the product is reduced, to target more price-sensitive customers such as early majorities and late majorities. A price skimming strategy tries to get the highest possible profit from innovators and early adopters. They are risk-takers and price insensitive. Innovators are those who want to be the first to get a new product or service. This enables a firm to quickly recover its sunk costs before increased competition and pricing pressure arise.Ĭonsider the diffusion of innovation, a theory that explains the rate at which a product spreads throughout a social system. In such a strategy, the goal is to generate the maximum profit in the shortest time possible, rather than to generate maximum sales. Therefore, the pricing strategy is largely effective with a breakthrough product, where the firm is the first to enter the marketplace. Price skimming is used to maximize profits when a new product or service is deployed.
Price skimming is not a viable long-term pricing strategy, as competitors eventually launch rival products and put pricing pressure on the first company. The pricing strategy is usually used by a first mover who faces little to no competition. Price skimming, also known as skim pricing, is a pricing strategy in which a firm charges a high initial price and then gradually lowers the price to attract more price-sensitive customers.
0 kommentar(er)
