What Is Price Skimming ?
Price skimming refers to the price setting technique where companies charge a high initial price for their products. It is a short-term strategy and firms gradually lower the price over time. The main objective of adopting this pricing technique to make more profit in short period of time.
In this post we are going to point out major pros and cons of price skimming method.
Advantages Of Price Skimming
The main advantages of price skimming strategy can be highlighted as follows:
1. Higher Profit
Price skimming helps to generate higher income in short period of time because companies set the price as high as possible to attract price insensitive buyers.
2. Quick Return On Investment
Because of higher price ceiling firms can earn more profit that helps to recoup investment and marketing expenses quickly. So, companies achieve quick return on investment.
3. Improves Brand Value
Another advantage of price skimming is that it helps to differentiate the company from the rivals in the market. Premium price creates the perception of quality brand. So, it improves brand value and image of the company.
4. Suitability
Price skimming strategy is suitable for technical and innovative products having unique features.
5. Beneficial For Retailers
It is beneficial for retailers because they can earn significant amount of profit because of higher profit margin.
6. Helpful In Segmentation
It helps the firms to segment the market on the basis of price sensitiveness and buying behavior of customers.
Disadvantages Of Price Skimming
The main disadvantages of price skimming can be described as follows:
1. Short-term Strategy
Price skimming is a short term marketing strategy and it is not suitable for long-run.
2. Demand Should Be Inelastic
This technique applies for the products having inelastic or very low demand elasticity. It does not work if the demand of product or service is elastic because increase in the price leads to decrease in the demand of that product/service.
Also Read
Meaning and objectives of price skimming
Advantages and disadvantages of competitive pricing
Advantages and disadvantages of penetration pricing
Advantages and disadvantages of cost plus pricing
3. Possibility Of Excess Inventory
It this strategy fails, it leads to excess inventory.
4. Difficult To Convince Customers
Company should justify the quality of the product, otherwise customers may feel abused. It may create negative impact and hamper brand loyalty.
Pros And Cons Of Price Skimming In Brief
Pros
* It generates huge profit in short period
* It increases the brand value and image
* It helps to segment the market
* It recovers costs quickly
Cons
* It is not applicable in case of elastic demand
* Product or service should be unique and innovative
* It may be difficult for the firms to justify the price
* This strategy may attract competitors