Price skimming refers to the pricing of a new product or service at a very high level (while you can get away with it). This type of pricing is often deployed for a product which has a competitive advantage that is not sustainable. This happens a great deal in technology when an innovative product first captures the customer’s attention and the competition later follows.
Another reason to set an initial high price is to establish the new product as a prestige or a high quality product. Buyers have been taught that quality comes at a higher price, so in a weird way buyers are comforted by the higher pricing.
Alternatively, when you begin with a high price, you have room to move down in price with the anticipated entrance of competition. To generalize, most prices go down when competition joins the fray. This logic suggests that you should anchor with a price high and prepare to negotiate.
An example of skimming would be the DVR (digital video recorder) product called TiVo, which has revolutionized watching television. Early on, this was a product for the early adopters and TiVo products commanded a premium price. Competition entered the market and prices softened. Soon all satellite receivers will have DVR features. Game over.
However, skimming is not the preferred pricing method for a niche market player. Niche marketers create value based on a sustainable competitive advantage and a partnership with the customer. The customer values the offering above other alternatives and considers the pricing fair.
Pricing on value is a better approach for niche players.
John Bradley Jackson
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