Price skimming | Conditions | Advantages | Disadvantages

Price Skimming - Conditions, advantages, disadvantages

Image: Price Skimming – Conditions, advantages, disadvantages

Understanding Price Skimming

Price Skimming aims at reaching a segment of the market which is relatively price insensitive. Under this pricing strategy, the export firm fixes a very high price for its product. The firm sells its product at a high price in the segment of the market which is willing to pay a premium price for the value received. Skimming enables the marketer to recoup the investment quickly. It allows him to meet development expenses in a short span.

Conditions where price skimming desirable

Skimming policy is desirable in the following cases:

  • If a limited supply exists, the company may follow a skimming approach to match demand and supply.
  • Where the exporter wants to skim the cream before competitors enter the market.
  • Where a company wants to maximize its revenue.
  • When initial cost of production is very high which has to be recovered as early as possible.
  • Where the products are of specialty goods such as fashion-oriented goods.
  • Where the segment of the market is willing to pay a premium price for the value received.
  • Where the price and quality relationships are viewed favorably. High prices imply high quality for quality conscious customers.

Advantages of price skimming

Following are the important advantages of skimming the cream of the market.

1. High prices maximize the revenue available to the manufacturer.

2. Higher prices in the initial stage covers up development expenses which required to be incurred by the manufacturer.

3. Generally, it is easier to quote a higher price in the initial period and gradually reduce it to create a mass market for the product.

4. Skimming is advantageous where products are likely to become out of fashion within a short span.

5. As higher prices bring in large cash flows, funds will not be locked up. The exporter can employ the funds in other areas of market development.

6. Premium products are the status symbol for buyers in high income bracket.

Disadvantages of price skimming

1. High prices may not evoke quick sales.

2. As very few people buy the product, the brand loyalty of the product may suffer.

3. In the long run, people may shift their loyalty to low priced goods.

4. High profit margins lure competitors selling similar products.

5. Due to low demand for the product, economies of large scale production are not realizable.