Price skimming is a strategy where goods have high starting prices that fall over time, used to induce consumer sales. Benefits include high profits, exclusivity, and market control. It can be used for new or differentiated products, compensating for high manufacturing costs, and creating a perception of value. It can also be used to control a specific segment of the market.
Pricing strategies are among the most important ways a company competes in a market, primarily to induce consumer sales. One strategy when selling goods in a market is to use price skimming, where goods have high starting prices that fall over a specific period of time. Firms can lower the price of a good for any number of reasons, such as consumer entry into a market or when consumers become more price sensitive for certain items. The benefits of price skimming include high profits, creating a sense of exclusivity, and controlling the market. Like many strategies in business, the use of price skimming should be subject to change as the market changes due to consumer demand or other factors.
In some market conditions, the use of price skimming is a strategy to achieve higher profits with a new or differentiated product. For example, a new technology, be it hardware or software, may allow a company to charge high prices due to a lack of competition. This doesn’t necessarily mean that the new product was expensive to create; it just means that a company can charge a high upfront price for the product itself. In some cases, a company charges these high prices to compensate for specific costs related to manufacturing, which can be quite high in some cases. Either way, this can be a popular strategy to use at certain times.
Another benefit of a price reduction strategy is the creation of exclusivity for a particular product or service. In the minds of some consumers, a high price simply means that a good or service must have some special reason to charge such a fee. The product may be of high quality, have a particular use or simply be one of a kind on the market. Now, that doesn’t necessarily mean that the product actually provides a better service to consumers than any other item. In fact, the item may not be that valuable; the purpose of pricing strategy is simply to create the perception of value in a consumer’s mind, which makes the individual purchase of the item.
Firms may attempt to control a market through the use of price skimming. In some cases, a competitor may relate a high product price to an expensive cost of production. Or, a company that charges high prices for a certain set of products is only looking for a niche market, which cannot support a large number of competitors. In either case, a company can use price skimming to make a profit while controlling a specific segment of the market.
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