What is Skimming Pricing?
Skimming Pricing is the strategy that sets an intentionally high price relative to the prices of competing products. Often called Price Skimming, it is a pricing technique in which a company will charge a high beginning price and then progressively reduces it to capture more price-sensitive clients.
Understanding Skimming Pricing
When a new sort of commodity comes on the market, price skimming is frequently practiced. The idea is to make as much profit as possible when customer demand is high and there is no competition on the market.
Once all the objectives are satisfied, the actual product maker can cut pricing to appeal to more budget-conscious customers while maintaining quality against any low-cost knockoffs that enter the market. This stage takes place when the seller's overall sales start to decline at the highest price he or she may charge, causing them to cut the price to fulfil consumer needs.
When a specific product is launched, price skimming is employed to make it more profitable. As a result, in the best possible way, when the company is the first to market, the pricing technique is highly effective. The purpose of such a plan is to make the most money in the shortest period of time rather than to make the most sales. This allows a company to swiftly recoup its sunk expenses before facing rising competition and price pressure.
Price skimming might not be quite as beneficial for any follow-up competitors’ products. Because the early industry of early adopters was being drained, additional consumers may be hesitant to pay a higher price for a new competitor unless it offers considerable enhancements over the first.
Practical Example
JBL Limited is a smartphone manufacturer that has just created new patented software for its handsets. To recoup its development costs, the company uses a price skimming approach and sets a skim price of A1. Following the satisfaction of demand at A1, the corporation determines a follow-on pricing at A2 to grab price-sensitive users and put pricing pressure on competing firms.
In Sentences
- Price skimming is a product pricing strategy in which a company can charge the maximum initial price that buyers are willing to pay and then gradually decreases that price over time.