The price a firm charges for a good or service is typically less than the value

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 then lowers it over time. As the demand of the first customers is satisfied and competition enters the market, the firm lowers the price to attract another, more price-sensitive segment of the population. The skimming strategy gets its name from "skimming" successive layers of cream, or customer segments, as prices are lowered over time.

Key Takeaways

• Price skimming is a product pricing strategy by which a firm charges the highest initial price that customers will pay and then lowers it over time.
• As the demand of the first customers is satisfied and competition enters the market, the firm lowers the price to attract another, more price-sensitive segment of the population.
• This approach contrasts with the penetration pricing model, which focuses on releasing a lower-priced product to grab as much market share as possible.

How Price Skimming Works

How Price Skimming Works

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

Once those goals are met, the original product creator can lower prices to attract more cost-conscious buyers while remaining competitive toward any lower-cost copycat items entering the market. This stage generally occurs when sales volume begins to decrease at the highest price the seller is able to charge, forcing them to lower the price to meet market demand.

Skimming can encourage the entry of competitors since other firms will notice the artificially high margins available in the product, they will quickly enter.

This approach contrasts with the penetration pricing model, which focuses on releasing a lower-priced product to grab as much market share as possible. Generally, this technique is better-suited for lower-cost items, such as basic household supplies, where price may be a driving factor in most customers' production selections.

Firms often use skimming to recover the cost of development. Skimming is a useful strategy in the following contexts:

• There are enough prospective customers willing to buy the product at a high price.
• The high price does not attract competitors.
• Lowering the price would have only a minor effect on increasing sales volume and reducing unit costs.
• The high price is interpreted as a sign of high quality.

When a new product enters the market, such as a new form of home technology, the price can affect buyer perception. Often, items priced towards the higher end suggest quality and exclusivity. This may help attract early adopters who are willing to spend more for a product and can also provide useful word-of-mouth marketing campaigns.

Price Skimming Limits

Generally, the price skimming model is best used for a short period of time, allowing the early adopter market to become saturated, but not alienating price-conscious buyers over the long term. Additionally, buyers may turn to cheaper competitors if a price reduction comes about too late, leading to lost sales and most likely lost revenue.

Price skimming may also not be as effective for any competitor follow-up products. Since the initial market of early adopters has been tapped, other buyers may not purchase a competing product at a higher price without significant product improvements over the original.

44.The price a firm charges for a good or service is typically less than the value placed onthat good or service by the customer. This is because:A.the customer's disposable income is significantly higher than what themarket demands.B.the customer captures some of that value in the form of aconsumer surplus.C.regulatory mechanisms ensure that the customer is not overcharged forproducts/services.D.marketers implement psychological pricing tactics to ensure that customersperceive the prices to be low.The price a firm charges for a good or service is typically less than the value placed onthat good or service by the customer. This is because the customer captures some ofthat value in the form of what economists call a consumer surplus.

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45.The value of a product to an average consumer is V; and the average price that thefirm can charge a consumer for that product is P. Here, V - P can be termed as:

46.A consumer surplus can be best described as:

47.A strategy that focuses on increasing the attractiveness of a product is referred to asa(n):

Why the price that company charges is less than the value placed on that good or service by the customer?

Which of the following is typically an example of a support activity in a firm's value chain?

Which of the following statements is true the amount of value a firm creates is measured by the difference?

Which of the following is less likely to add to the pressure for a firm to be locally responsive?