Introduction And Meaning Of Price Skimming
Price skimming is a short-term pricing strategy where firms charge highest
initial price for their products or services. Generally, producers of
innovative and technical products adopt this pricing technique because buyers of
these items are price insensitive and there is less competition in the market.
Firms reduce the price of their products after sometimes to attract price
sensitive consumer. The aim of price skimming is to generate more revenue in
short period of time to recover invest or to reach break even point
quickly.
Objectives Of Price Skimming
The main objectives of price skimming can be pointed out as follows:
1. To Attract Price Insensitive Buyers
Firms practice this strategy to attract price insensitive customers who are
willing to pay higher price for newly launched products or services.
Therefore, firms charge the highest price for a short period.
2. To Generate Maximum Profit
When firms set higher price ceiling, it helps to generate higher profit.
So, price skimming brings higher profitability in short period.
3. To Recover Investment And Other Costs
Another objective of price skimming is to recover the investment as quickly
as possible. High short term profit helps the company to reach the break
even level in short period of time that helps to recover investment and
other costs such as research and development costs, launching costs,
marketing costs etc. with fewer volume of sales
This strategy offers distributors or retailers a higher profit margin so
they can earn more profit with small volume of sales.
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5. To Create Prestigious Brand
Price skimming helps to earn reputation and create prestigious image of
both firm and the brand. So, it is useful for improving the image and
goodwill of the firm and the product.
6. To Assist In Market Segmenting
It helps to analyse the market and segment customers. So, the company can
generate revenue from different groups of customers.
