02:23
Faizan
With a skimming pricing strategy, a company introduces a product into the market at a high initial price, and then gradually lowers the price after the product has been on sale for a long time. The initial purchasers, the early adopters, are willing to pay a higher price for the product because they want the product immediately.
Production
The skimming strategy is very useful when a firm needs additional revenue to manufacture an item for the mass market. The company may only have the materials and labor to make a few products, and it will still need to pay for other expenses such as research and development. The company can reinvest its income from sales at high prices, so its production cost is lower for future items.
Effectiveness
Skimming is very effective for products that have a short life cycle, such as computer equipment and electronics. A new computer usually has much better graphics and calculation capability than an older model, so a user who wants the latest game or word processing program is often willing to pay a premium to get a powerful computer.
Subsidy
When a company uses the skimming pricing strategy, the early purchasers of the product subsidize the future purchasers. Thus, many future consumers can afford to purchase items such as CD and DVD players, televisions, stereos and computers that were very expensive when they were first introduced.
Status
Skimming also allows early adopters to purchase a status symbol. A television screen with new features will initially be unaffordable to most buyers because of its high purchase price, so the owner can show it off. The business gains repeat customers when it uses this strategy, since the owner may want to purchase a new product the following year to show it off again.
Advertising
Skimming allows the business to save money on advertising. The early adopters who have the extra money to spend on the product when it first comes out have tastes that are different from those of later buyers who are more motivated by price. The company can design different ads for each group, and run the ads in separate markets.
Discount
Discounts motivate a consumer to buy the product, since the product appears to be a better deal. When a business uses the skimming strategy, it initially places a high price on the item. If the business later reduces the price by 50 percent, the buyers will believe that they are getting a valuable item at a sale price. According to INSEAD, skimming is one of the best strategies a retailer can use.
Production
The skimming strategy is very useful when a firm needs additional revenue to manufacture an item for the mass market. The company may only have the materials and labor to make a few products, and it will still need to pay for other expenses such as research and development. The company can reinvest its income from sales at high prices, so its production cost is lower for future items.
Effectiveness
Skimming is very effective for products that have a short life cycle, such as computer equipment and electronics. A new computer usually has much better graphics and calculation capability than an older model, so a user who wants the latest game or word processing program is often willing to pay a premium to get a powerful computer.
Subsidy
When a company uses the skimming pricing strategy, the early purchasers of the product subsidize the future purchasers. Thus, many future consumers can afford to purchase items such as CD and DVD players, televisions, stereos and computers that were very expensive when they were first introduced.
Status
Skimming also allows early adopters to purchase a status symbol. A television screen with new features will initially be unaffordable to most buyers because of its high purchase price, so the owner can show it off. The business gains repeat customers when it uses this strategy, since the owner may want to purchase a new product the following year to show it off again.
Advertising
Skimming allows the business to save money on advertising. The early adopters who have the extra money to spend on the product when it first comes out have tastes that are different from those of later buyers who are more motivated by price. The company can design different ads for each group, and run the ads in separate markets.
Discount
Discounts motivate a consumer to buy the product, since the product appears to be a better deal. When a business uses the skimming strategy, it initially places a high price on the item. If the business later reduces the price by 50 percent, the buyers will believe that they are getting a valuable item at a sale price. According to INSEAD, skimming is one of the best strategies a retailer can use.
Posted in: Products & Brands
