Price Skimming

10 Key excerpts on "Price Skimming"

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  N5 Marketing Mix

  • B van der Westhuyzen, J van der Merwe, B van der Westhuyzen, J van der Merwe(Authors)
  • 2016(Publication Date)
  • Future Managers

    (Publisher)

  Skimming price strategy The skimming price strategy is a short-term strategy that is mainly used in the introductory phase of the product life cycle. It involves setting a high initial price, while the differential benefit of the product is still high and competition is minimal. The high price is used to attract a part of the market that is willing to pay the high price . The result of using this strategy is maximum profits . E-LINK http://www.wsj.com/articles/ SB1000142412788732377720 4578189391813881534 118 N5 The Marketing Mix The skimming strategy is mainly used under the following circumstances: – When the product is unique and new to the market. – When the potential customers know relatively little about the product. – When there are relatively few or no competitors in the market. – When rapid recovery of an investment is needed. – When the organisation is a leader in the industry. – When the differential advantage of the product is legally patent-protected. – When price is used to segment the market – When the demand for the product is inelastic in terms of price. – When the business deliberately keeps demand low because it is not operating at full capacity yet. – When the cost and demand for the product are not yet known. Market penetration strategy With a market penetration strategy, low prices are used when the product is introduced to the market for the first time. The expectation is that the product will sell in large quantities to the mass market . The main purpose is to discourage competitors and gain a large portion of the potential market. This strategy requires long-term planning . It is bears great risk and can only be applied by businesses that have enough capital. The market penetration strategy is mainly used in the following conditions: – When there is large potential market for the product. – Where a great degree of potential competition is present. – When a low price can be used to keep potential new competitors out of the market.

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  Essentials of Marketing Management

  • Geoffrey Lancaster, Lester Massingham(Authors)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  For example, we might decide to set a lower price on an individual product than we might otherwise do because it helps to sell other, perhaps more profitable, items in the line. Other elements of the marketing mix As with all marketing mix elements, it is important that pricing reflects, and is consistent with, other elements of the mix. A high-quality, expensively packaged product may be looked at with some suspicion by potential buyers if it carries a bargain price tag. Product lifecycle The competitive situation for a product changes throughout the lifecycle of a product. Each different phase in the cycle may require a different strategy. Pricing plays a particularly important role in this respect. Care should be used in interpreting the possible strategic implications of each of the lifecycle stages. Pricing in the introductory stage of the lifecycle: with an innovatory product, developers can expect to have a competitive edge for a period of time. With innovatory new products, a company can elect to choose between two pricing strategies: • Price Skimming: the setting of a high initial price that is lowered in successive stages; • price penetration: the setting of a low initial price. Price Skimming is where the setting of a high initial price can be interpreted as an assumption by management that eventually competition will enter the market and erode profit margins. The company sets a high price so as to ‘milk’ the market and achieve maximum profits available in the shortest period of time. This ‘market skimming’ strategy involves the company estimating the highest price the customer is willing or able to pay, which will involve assessing the benefits of the product to the potential customer. This strategy has been successfully carried out by firms marketing innovative products that have substantial consumer benefits. An example of Price Skimming was Apple’s iPod. Launched in 2005, the initial price was set at £450

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  Financial Management for Farmers

  • Nekesah T. Wafullah(Author)
  • 2019(Publication Date)
  • Society Publishing

    (Publisher)

  6.2. Price Skimming Although Price Skimming is very attractive to those farmers that do not wish to put the hard work into developing a market over the long run, this can be a very risky strategy (Bozic et al., 2012). The use of a Price Skimming strategy does not imply automatic success (Barry et al., 2000). Certainly, it is not a shortcut that allows you to avoid doing the other important aspects of financial management (Dercon and Gollin, 2014). The basic aspects of this strategy involve setting a price that is relatively high for your farm product and then gradually reduces that price with time. Perhaps one way of thinking about the Price Skimming strategy is a temporal version of what is known as yield management and price discrimination (Ministry of Agriculture and Rural Development, 2013). You can use it to recover your sunk costs in a relatively short period of time before the other competition comes in to flood the market (Sakuramoto, 2005). Once you have competition, you can decide to either exit that market or lower the price in order to remain competitive (Sakuramoto, 2005). The fact that you will already have covered your sunk costs means that you are at liberty to even undercut the new entrants into the market. The effect of a Price Skimming strategy is that you are riding down the demand curve (Bozic et al., 2012). It is a strategy that can enable you to capture any consumer surplus right at the beginning of the product life cycle where you have a monopolistic or quasi-monopolistic position (Barry et al., 2000). In that situation, you have low price sensitivity because the consumers have no option by to buy your product (Vermeulen et al., 2012). Figure 6.2 highlights the principles of Price Skimming. Cost Management and Pricing in Farming 139 Figure 6.2: Principles underpinning Price Skimming.

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  Wiley Pathways Small Business Management

  • Richard M. Hodgetts, Donald F. Kuratko, Margaret Burlingame, Don Gulbrandsen(Authors)
  • 2015(Publication Date)
  • Wiley

    (Publisher)

  The store often will price this produce at a high markup because the owner knows that they are the only source of bananas. When other stores begin getting their shipments of bananas, the owner then will drop the price down to its usual level. 296 UNDERSTANDING MARKETS AND PRICING In some cases, skimming is an ongoing strategy because market conditions support this approach. A good example is fashion boutiques where customers expect to pay high prices and often equate price with quality. Skimming also is used profitably when customers perceive a major difference between a high- priced good or service and lower-priced ones. For example, many patients prefer Table 10-5: Pricing for the Product Life Cycle Customer demand and sales volume will vary with the development of a product. Thus, pricing for products needs to be adjusted at each stage of their life cycle. The following outline provides some suggested pricing methods that relate to the different stages in the product life cycle.

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  Pricing Done Right

  The Pricing Framework Proven Successful by the World's Most Profitable Companies

  • Tim J. Smith(Author)
  • 2016(Publication Date)
  • Wiley

    (Publisher)

  Cummins took this position with the 5 KVA generators when it reentered Nigeria and faced an entrenched local competitor assembling lower-cost 5 KVA generators with Chinese components (Tita 2010; Hagerty and Conners 2011). In an “exploring the market“ strategy, Cummins initially held prices relatively high for its 5 KVA generators to maintain unit-level profitability while concentrating sales and marketing efforts on its larger, diesel-powered generators, which faced fewer competitive price pressures. In this way, Cummins’ Price Skimming strategy for its lower powered generators enabled the company to offer the breadth of its product line while maintaining a price neutral position with its high-powered generators.

  More standard market segmentation issues also lead to an apparent Price Skimming strategy for most—but not all—of the market. In these cases, redefining the metric of benefit to be that of the target customers may reveal that the pricing strategy that most customers consider to be skimming is actually a price neutral or penetration strategy for the target customers.

  In a well proven and documented time-segmentation strategy with new products, a firm may initially market a product with a high price to extract profits from those who value the offering the most and are willing to pay to get the offering immediately and then lower prices over time to attract the larger, more general market (Stokey 1979). This strategy was famously executed by Apple with the launch of the first iPhone in 2007, where the launch price of $599 was dropped to $399 within a month despite high demand (Wingfield 2007). Similar patterns can be found in the pricing patterns of films, as they transition from first-release cinemas to pay-per-view to cable network and DVD sales, or literature, as it transitions from hardback to softback. These kinds of time-segmentation pricing strategies are often perceived as a form of Price Skimming.

  A less discussed approach to time-segmenting the market can also occur during the end of a product category life cycle. When the product category is shrinking, a dominant firm may choose to seek high margins from its market (as in milking-the-cash-cow) until the market is dry in order to have the necessary cash to invest in the next market pursuit.

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  MBA Marketing

  • Malcolm McDonald, Ailsa Kolsaker(Authors)
  • 2017(Publication Date)
  • Red Globe Press

    (Publisher)

  This can be taken to the extreme where the basic product or service is given away for free, but a premium is charged for additional features, functionality, services and so on. Known as ‘freemium’ pricing, this strategy is pursued quite commonly in the online environment, particularly in relation to music, video, news and magazine content. Alternatively, it is argued that a skimming strategy (that is, a high relative price) could be appropriate, where: ■ demand is not particularly price sensitive; ■ there is a relatively flat cost curve (that is, unit costs at low volumes are not so much higher than unit costs at higher volumes); and ■ there is limited danger of competitive imitation. Apple is a good example of a company that employs a skimming strategy when new products are brought to market. Each time a new product is launched, Apple charges the highest price they know early adopters will pay. Once this category of buyer is saturated, the price is lowered. When the original iPhone first launched in 2007, the 4GB version sold for $499 and the 8GB version $599. Two months later, the latter was reduced by $200. Figure 11.6 suggests the possible pricing strategies that may be appropri-ate given the opportunities for value enhancement or cost reduction. Value enhancement is a strategy based on building perceived benefits, while cost reduction can provide the basis for successful price competition. The rationale behind each of these options can be demonstrated by the use of the experience curve concept. As we have seen, it is usually the case that penetration strategies are more appropriate where the opportunity for cost reduction is greatest – that is, rapid movement down a steeply sloping experience curve can be achieved. 208

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  The Strategy and Tactics of Pricing

  A Guide to Growing More Profitably

  • Georg Müller, Thomas T. Nagle, Evert Gruyaert(Authors)
  • 2023(Publication Date)
  • Routledge

    (Publisher)

  Given the strategic importance of customer value to the overall pricing strategy, we define pricing objectives in terms of the share of differentiating value that the firm attempts to capture in its price. This decision should be driven by judgments about what will yield long-term, sustainable profitability. As noted earlier, a low price will, other things being equal, induce customers to migrate to a new product or service more quickly. On the other hand, if the product’s differentiation is likely to be sustained by patents or copyrights, a low price established to drive sales means foregoing considerable margin over the long run. Pricing low initially in the hope that one can raises prices later is difficult given the effect of the initial prices on buyers’ future perceptions of price fairness. There are three alternative strategic choices that one might adopt for a pricing strategy: skimming the market, penetrating the market, or neutral market pricing. 2 But the choice is not arbitrary. Given a firm’s relative capabilities and market position, usually only one positioning will represent the most profitable option and often only one positioning will be sustainable. Let us examine the conditions under which each strategic choice might be most appropriate. Option 1: Skim the Market Skim pricing (or skimming) is designed to capture superior margins, even at the expense of large sales volume. By definition, skim prices are high in relation to what most buyers in a segment can be convinced to pay. Consequently, this strategy optimizes immediate profitability only when the profit from selling to relatively price-insensitive customers exceeds that from selling to a larger market at a lower price

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  The Routledge Companion to Financial Services Marketing

  • Tina Harrison, Hooman Estelami, Tina Harrison, Hooman Estelami(Authors)
  • 2014(Publication Date)
  • Routledge

    (Publisher)

  Financial markets have witnessed the introduction of many new innovations in recent years. One of the most difficult decisions facing a financial institution is how to price a new service in its market (Nejad and Estelami 2012). Certainly, the pricing process that was described in the previous section can be equally applied in the case of new financial services. However, there are also some pricing strategies that can be particularly useful in the case of new services. All classic marketing and pricing textbooks describe three basic strategies for pricing a new product or service: skimming pricing (i.e., a high initial price), penetration pricing (i.e., a low initial price) and pricing similar to competitive prices (for example, Monroe 2003, Nagle et al. 2010, Palmer 2008).

  Skimming pricing relates to a high initial price in order to achieve maximum short-term financial results. Its basic principle is to gain the highest possible price from each market segment; beginning with the highest value segments and moving on to the lower value ones. This strategy is the preferred option in the case of an innovative, high quality, differentiated service, which conveys a prestigious image and gives the company the opportunity to cover the costs of developing the new service and reduce the high initial price in the future. Competitors should not be able to enter the market easily and undercut the high initial price, while a significant number of customers should exist in the market and be willing to sacrifice low price for high quality.

  On the other hand, penetration pricing relates to a low initial price and is the preferred alternative when a company offers undifferentiated services, targeting price sensitive customers, especially in a mass scale. Moreover, this strategy aims at enticing new customers to try the new service, achieving satisfactory market share and discouraging the entrance of new competitors in the market. Furthermore, the strategy in question may be the preferred option when the company has the ability to reduce the unit cost as volume increases. Finally, pricing similar to competitors is the preferred option in the case of a market characterized by intensive competition and lack of differentiation among competing services.

  Nejad and Estelami (2012) examined the optimal pricing strategy for financial innovations through a simulation based approach. They demonstrated that when high degrees of price sensitivity exist and a short time horizon for competitive entry is expected, a low initial price is the optimal strategy. On the other hand, when price sensitivity is low and the expected time horizon for competitive entry is long, a high initial price would be the best choice for a financial institution.

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  Principles of Marketing

  A Value-Based Approach

  • Ayantunji Gbadamosi, Ian Bathgate, Sonny Nwankwo(Authors)
  • 2013(Publication Date)
  • Bloomsbury Academic

    (Publisher)

  224 pricing strategies ● Pricing by time: Travel companies use price discrimination by charging more for peak-time/rush-hour commuters and travellers whose demand is inelastic at certain times and periods of the day or year. Other examples are off-peak travel bargains and telephone charges Pricing strategies There are two generic pricing strategies: Price Skimming and penetration pricing. Price Skimming Price Skimming involves charging a relatively high price for a short time where a new, innovative or much-improved product is launched onto a market. A major disadvantage is that it encourages new entrants. A variation of Price Skimming is rapid skimming pricing strategy . This involves launching a new product with a high price and supporting the product with high levels of promotional expenditure, such as in case of a new product called Sunny Delight, launched by P&G in the in UK in 1998. This product eventually failed because of false health claims and was withdrawn from the market. Conditions for charging high prices include: ● Product provides high value ● Customers have high ability to pay ● Lack of competition ● High pressure to buy Penetration pricing Penetration pricing involves setting lower rather than higher prices in order to achieve a large or dominant market share. It is often used by businesses wishing to enter a new market or build on a relatively small market share. A successful penetration pricing strategy may lead to large sales volumes and market share and therefore lower costs per unit. A variation of penetration pricing is rapid penetration pricing strategy , which involves launching a new product with a low price and supporting the product with high levels of promotional expenditure in order to gain an initial share of the market. This is organized on a large scale in the washing and liquid soap markets.

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  The Strategy and Tactics of Pricing

  A Guide to Growing More Profitably

  • Thomas T. Nagle, Georg Müller(Authors)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  Skim pricing (or skimming) is designed to capture superior margins, even at the expense of large sales volume. By definition, skim prices are high in relation to what most buyers in a segment can be convinced to pay. Consequently, this strategy optimizes immediate profitability only when the profit from selling to relatively price-insensitive customers exceeds that from selling to a larger market at a lower price. In some instances, products might reap more profit in the long run by setting initial prices high and reducing them over time—the “sequential skimming” strategy we discuss below—even if those high initial prices reduce immediate profitability.

  Buyers are often price insensitive because they belong to a market segment that places exceptionally high value on a product’s differentiating attributes. For example, in many sports a segment of enthusiasts will often pay astronomical prices for the bike, club, or racquet that they think will give them an edge. You can buy a plain aluminum canoe paddle for $35. You can buy a Bending Branches Double Bent paddle (wood laminate, 44 ounces) for $149. Or you can buy the Werner Camano paddle (graphite, 26 ounces) for $249. The Werner Camano not only makes canoeing long distances easier but also signals that one belongs to a select group that has a very serious commitment to the sport.

  Of course, simply targeting a segment of customers who are relatively price insensitive does not mean that they are fools who will buy at any price. It means that they can and will pay a price that reflects a large portion of the exceptionally high value they place on the differentiating benefits they expect from the purchase. Thus skim pricing generally requires a substantial commitment to communicate why the differentiating features of the product or service can be expected to yield benefits that justify a high price to at least some customers. If effective value communications are neither practical nor cost-effective, then the firm must limit its pricing to reflect what it can communicate or to what potential customers are likely to believe simply from what they can observe.

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