Price skimming is a pricing strategy which utilizes a high price for a brief period of time; this type of pricing is generally used with the introduction of a new product. The purpose of this pricing strategy is to “skim” the profits before the competition enters the market.

When TiVo launched its early DVR products they commanded a substantial pricing premium in the market with the early adopters. This premium helped pay back TiVo for the R&D costs associated with the creation of the new product and the new market. Where a highly innovative product is launched, research and development costs are likely to be high. This includes the costs of introducing the product to the market via promotion, advertising etc.

Yet, there are other reasons for establishing a high price. A company can build a high-quality image for its product by charging high prices initially. This is especially true for luxury products which can benefit from skimming since the buyer tends to be more ‘prestige’ conscious than price conscious. To this buyer the high price denotes quality.

Similarly, where the quality differences between competing brands is perceived to be large, or for offerings where such differences are not easily judged, the skimming strategy can work well. An example of the latter would be for the manufacturers of “designer” watches. Buyers of Rolex watches expect to pay more for the brand; it is almost as if they demand it.

The beauty of skimming is that the price can be lowered later if necessary. The converse is seldom, if ever, true. Once you educate the market about your price, raising the price is damn near impossible.

John Bradley Jackson
© Copyright 2008 All rights reserved.

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