Skimming pricing strategy
Skimming pricing strategy involves the use of inflated prices in the short term. In this way, company highly values new products or most wanted versions of all available products. These products have a relative competitive advantage, because the demand, at least in the initial stage, is relatively inelastic. Short-term conditions relating to the evolution of this strategy arise from the fact that sooner or later competitors come on the market with similar or identical products. Competing products will eliminate the advantage position obtained thanks to the precedence and prime prices of these products.
Applications of skimming pricing strategy
Skimming pricing strategy is good for innovative, unique or highly improved products. In this case costs for research and promotion are usually high. High prices and margins are needed to cover these costs, and the costs associated with smaller volume of production in the initial stage. An additional element that allows companies to quickly collect the cream is to build prestige with high quality product and high prices during the introduction of the product on the market.
Besides, an important advantage of this strategy is that it is easier to lower prices than raise them. By applying the strategies companies can bring down prices in a situation of competition. Strategy of cream collection is also very effective in segmenting of market. Because this strategy involves high prices, it is liked by the dealers because it provides them with high margins.
Skimming pricing strategy is particularly useful in the case of selling products attractive to the eyes of the customer, because during the introduction of such a product they are more sensitive to prestige rather than on price. This strategy works equally well when selling branded products of high quality.
- Besanko, D., & Winston, W. L. (1990). Optimal price skimming by a monopolist facing rational consumers. Management Science, 36(5), 555-567.
- Cabral, L. M., Salant, D. J., & Woroch, G. A. (1999). Monopoly pricing with network externalities. International Journal of Industrial Organization, 17(2), 199-214.
- Terzi, M. C., Sakas, D. P., & Seimenis, I. (2012, January). Pricing strategy dynamic simulation modelling within the high-tech sector. In Key Engineering Materials (Vol. 495, pp. 167-170).