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What is Price Skimming And How does it Work In the Market?

What Is Price Skimming

Price skimming is a pricing strategy of a product in which the highest starting price charges by a firm that consumers will pay and formerly lowers it with time. As the first customers demand, it is satisfied, and competition in the market enters, the firm to attract another lowers the price and population more price-sensitive segment. The strategy of skimming gets its name as “skimming” customer segments or successive cream layers after a while; prices are lowered.

The “skimming” name originates from the idea of exploring all potential buyers such as a stack – those on the top are eager to pay the maximum, even though those by the bottom wish to pay the minimum.

How it Works?

It is frequently used when a product of a new type enters the market. The aim is to collect as much revenue as likely when the demand of consumers is high, as well as competition in the market hasn’t entered.

When those goals were met, the creator of the original product can lower the product prices to attract buyers who are more cost-conscious through remaining competitive on the way to any lower-cost copier items in the market entered.

Firms frequently use skimming for the cost of development recovery. Price Skimming is a beneficial strategy in the given settings:

  • Adequate potential customers are willing to buy a high priced product.
  • The high price of a product doesn’t attract competitors.
  • The price lowering ought to have only a slight effect on rising sales volume as well as decreasing unit costs.
  • The high price is taken as a high-quality sign.

Price Skimming Advantages 

Perceived quality

It aids build a high-quality product perception and image.

Cost recovery

To a firm, it helps in recovering its development costs quickly.

High profitability

For the company, it creates a high-profit margin.

Benefits of Vertical supply chain 

It assists distributors in earning a higher percentage. The price increase on a product of $500 is far more significant than on a $5 product.

Price Skimming Disadvantages 

Deterrence

If the firm incapable of validating its high price, customers may not be eager to buy the product.

Sales volume limitation 

A firm might not be capable of economies of scale use if a skim price creates inadequate sales.

Ineffective long-term strategy

It isn’t a feasible long-term strategy of pricing as competitors will ultimately enter the market with the pressure of rival pricing and products.

Consumer loyalty

If a product that costs 1,000 dollars at launch has a follow-on $200 price of in some months, innovators & primary adopters may feel exploited. So, if the firm has a price skimming history, consumers may wait for some months before buying the product.

Foundation of Price Skimming

Price skimming used for profit maximization when a new service or product deployed. So, the pricing strategy is effective in an advanced product in which the firm is the 1st to enter the market. In this strategy, the aim is to produce the maximum profit in the small-time period possible instead of maximum sales. It enables a firm to recover quickly. Its sunk costs formerly increased pricing pressure and competition.

Price Skimming Limits

It is fundamentally limited in 5 diverse ways:

At the institutional level

It is a complex price discrimination form. Price discrimination in maximum countries is illegal as well as price skimming could consequently be a risky strategy to adopt for companies.

At market level

Skimming frequently gives rise to high margins. Meanwhile, high margins are very attractive; competitors will desire to enter into the market with a similar or a highly comparable product, creating the skimming effect disappear slowly. 

At brand level

If it turns out to be too clear for customers that a firm is using a skimming strategy of pricing for any specified product, they will whether wait for the product price to drop before buying or be dissatisfied if they have already bought this product at an excessive price.

At retailer level

Skimming infers that selling a product at a lower price, beginning at a high price and slowly decreasing it further & further. 

At the customer level

Price Skimming is related to price discrimination after a while, and so indicates that a product will be dispersed more gradually.

Conclusion

Price skimming includes fixing a high price before other competitors enter the market. This is frequently used for a new product launch that faces no or little competition – typically because of certain technological features. It also has some advantages and disadvantages.

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