In case a product does not follow the inelastic demand curve, it leads to fluctuations in sales where it might cause increased demand when prices are lowered and vice-versa. The skim pricing strategy is most effective when the product follows an inelastic demand curve – a demand curve where the quantity of the product is not majorly affected by the change in prices. There are a lot of things that could go wrong if done improperly – most of which negatively affect the brand. Price skimming can only be implemented after thorough research and analysis of the market conditions, customer sentiments and brand-perception. Also, it leads to loss of sales and user base if the business is unable to justify the higher price in the long run. It doesn’t last long since the market will gain a few competitors and will be harder to hold onto the high markups on its goods. While the skim pricing strategy helps in increasing the profit margins of the company, this is only for a short while. Disadvantages of Price Skimming Mostly Short-term Benefits Price skimming helps businesses have better control over the pricing of their products. Price skimming helps businesses change the price on their products according to the market situation, brand perception, customer response, product features, and competition. The higher price also helps build a better brand image – if it suits the branding and is implemented properly – among consumers. Higher prices tend to draw news and press coverage, helping get more exposure and advertising for the product/service quite easily. These early-adopters and enthusiasts help a business to gain more insight into the functioning and performance of their products. The early-adopters and really avid enthusiasts are the two main target customers during the initial launch of a product – since they are the ones who buy the product even at the higher initial price and usually are either well informed or willing to provide feedback to the company. It helps them make the most out of the certain market segment that is created from pricing highly and then reaching the rest by reducing the price as time passes. Higher Profit MarginsĪ product priced at its maximum limit helps in generating higher profits for the company. This further helps to maintain inventory and also test the waters when venturing into newer markets or introducing newer products/services. By initially setting the price high, the businesses tend to filter out (read: segment) the market into different customer categories – early-adopters, brand loyalists, and regular consumers. This is a major benefit obtained from the proper implementation of price skimming. This also helps in recuperating advertising and marketing costs quickly. The higher initial price right from the launch helps recover the amount invested in the research and development of the product/service quite quickly and easily. Advantages of Price Skimming Recover Costs Quickly The price of the PS3 was then lowered every passing year and eventually reached $299 during the year was discontinued. But while the PS2 was conservatively priced, the company knew that there were lots of potential buyers for the PS3 and hence set a higher initial launch price. Take Sony’s PlayStation 3 console for example – it was initially launched at a price of $599 since it basically had no competition and was deemed to sell since their previous console, the PlayStation 2, was a huge hit. While Sony is well-known for its TVs and smartphones, we can observe price skimming strategy in action on their gaming console lineup. This is because the newly launched products usually have no competition or the brand is well-established in the minds of its users in order to warrant a lot of potential buyers for it. For example, tech companies usually use price skimming. Price skimming suits well for certain industries more than the others.
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