What is Price Skimming? Price of each product determines the amount of profit or loss for nay product. Especially when we launch a new good in the market then we always discuss the factors which are connected with price. In business, pricing is essential. When a new product is released, then a strategy is needed to figure out the price so that the product can compete in the market and is superior when compared with other similar products.
One method that can be used is price skimming or pricing strategies by skimming.
Definition of Price Skimming?
What is Price Skimming? Price skimming is a pricing technique, where the company or service provider will set a very high price for an item, then the price will go down over time. This kind of strategy is usually used when a new product is launched.
High initial prices are used to increase company revenue while testing client satisfaction. When initial consumers are satisfied with the product, market demand will automatically increase. Coupled with progressively fierce competition, the company reduced the price of the product.
Objective of Price Skimming
Another goal is to capture consumers in a broader sector, especially those with a low budget to buy the product. The skimming method can also trigger the emergence of many competitors because of the large difference between the first price and the price of the product after a drop.
How does Price Skimming Work?
The price skimming method is widely used by manufacturers of electronic goods and gadgets such as smartphones, laptops, smartwatch computers, and many more. At the beginning of the launch, the latest gadgets that offer advanced features will be priced at exorbitant prices, not even available to everyone.
But after selling the first stage and getting positive reviews from its users, the organization will reduce the price of the item. Along with meeting market demand, the price reduction also aspires to reach a broader market.
Price Skimming & Profit Margin
That’s how price skimming functions. The initial objective of the high prices set up for new products is to improve revenue and profit as much as possible for the company. After this goal is arrived at, the price of the product will be decreased so that sales boost.
This price reduction is also a step in expectation of the organization against emerging competitors. Usually this rival product is a cheap version of the original product, with almost the same shape and specifications, but at a much cheaper price.
Price Skimming Strategies for low priced products
Price skimming can indeed be called a surefire technique for a business that will issue a new product. But that does not mean this method can be applied to all types of products. A company is doing price skimming to recuperate the large amount of production costs.
For high-priced products, price skimming is the right technique. But for goods with low prices such as household requirements, the application of the price skimming method is not appropriate to attract as many consumers as possible.
Price skimming is for Quality Products
The existence of a positive prospect guarantee that consumers will still buy the product even though the price is expensive.
The high price set for a product does not provoke the emergence of new competitors.
The price reduction carried out did not have a fatal impact on enhancing the number of product sales and lowering the cost per product unit.
Expensive prices indicate the best quality of a product.
Price Skimming Disadvantages
If the company cannot provide the right reason for the high price of a product, consumers will feel reluctant to buy it. Before setting a high price for a new product, the company must be able to determine the sale value of the product to attract consumers to buy the product even though the price is expensive.
Not a long term strategy. Although it is very profitable, price skimming is not a strategy that can be applied for a long time. New competitors will appear carrying the same product, but offering lower prices.
Loss of Customers’ Loyalty
Loss of consumer loyalty. Price skimming can be a company gap that can be used by consumers. If a company always adopts the same pattern in every new product that is launched, then consumers prefer to wait a few months to get a cheaper price.
So, the management takes the decision wisely before increasing the price or before setting up the price.