Skim Pricing - Introducing a product at a high price in a order to skim off the top of the market.
- Setting a high price to maximise profit per unit
- The product is sold to successive layers of the market
- The top segment is skimmed off first with a high price
Objective: Maximize profit per unit to achieve quick recovery of development costs
- The objective is to skim off customers who are willing to pay more to have the product sooner.
- Prices are lowered later when demand from early adopters falls and the firm needs to increase sales the early and late majority.
- The main objective is to benefit from high short term profits (due to the newness of the product) and from effective market segmentation
Skimming is used when...
- The product is innovative and unique
- Quality is important
- Demand is inelastic
- Product life cycle is expected to be short
- The market consists of distinct segments
- Heavy promotion is required
- There is no significant competition
- There are high barriers of entry to the market
- Price is seen as an indicator of quality
- There is potential for economies of scale
Skimming suits the diffusion model...
Innovative product is spread in the following way:
- Innovators - The real trend setters
- Early adopters - Quick to follow the trend setters
These two groups represent 16% of the market and tend to be ore affluent than the rest.
High price will not necessarily deter them from buying especially if the latest product adds to their prestige.
The remaining categories (early majority, late majority and laggards) will only take up the product when the price comes down.
Advantages of Skimming...
- Allows for some return on set up costs
- By charging a high initial price the firm can build a high quality image for the product
- Allows high mark ups for dealers
- Skimming can be an effective strategy in segmenting the market- a firm can divide the market into a number of segments and reduce the price at different stages in each, thus acquiring maximum profit from each segment
- For conspicuous or prestige goods, the pratice of price skimming can be particulary successful, since the buyer tends to be more prestige conscious than price conscious
Skimming ( 1- For skimming / 2- Against skimming )
1
- Early cash recovery
- Short payback period
- Short run profits
- High profit margin
- High price often seen as sign of high quality
- Appeals to early adopters of the product
2
- Encourages the entry of rivals
- Advantages Can be short lived
- High margins at the expense of high volume
Examples of skimming...
The following examples were introduced using a skimming princing strategy.
- Colour TV
- Video Recorders
- Flat screen TV
- High definition Tv
- Personala Computers
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