PRICE SKIMMING

the practice of price skimming involves charging relatively higher prices for a short time where a new, innovative, or much improved is launched into a market.

the objective with skimming is to 'SKIM' off costumers who are willing to pay more to have product sooner, prices are lower later when demand from early adaptors falls.

the success of price skimming strategy is largely depended on the elasticity of demand for a product either by market as a whole or by certain market segments.

high prices can be enjoyed in the short term where demand is relatively inelastic. in the short term the suppliers benefit from monopoly profits. but as profitability increases , competing suppliers are likely to be attracted to the market as the prices fall as competition rise.

the main objective of employing a price skimming strategy is therefore to benefit from high short term profits and from effective market segmentation.

advantages of price skimming strategy

by charging higher prices initially company build up high quality image for its product. charging initial high prices allows firm the luxury of reducing price when the completion arrives

skimming can be effective strategy in segmenting the market. a firm can divide the market in number of segments and reduce price at different satges in each, thus aquiring maximum profit from each segmant

where a product is distributed via dealers, the practice of price skimming is very popular, since high price for the supplier are translated into high mark up for the dealer

for conspicious or prestige goods the practice of price skimming can be particularly sucsessful since buyer tends to be more prestige conciuos than price concious. similarly where the quality differences between competing brands is precived to be large or for offerings where such differences are not easily judged the skimming startegy can work well.