Question

Explain the below mentioned pricing strategy:

Skimming pricing strategy

Answer 1

In this strategy, a very high price is set so that in the initial stages, the cream of demand may be skimmed, and the investment made in the product is quickly realised. The aim is to ‘sell to classes’ who don’t care how much they pay for a novel product. Later on, the price may be reduced to tap other segments of the market. This strategy is appropriate in the case of a highly distinctive product which is aggressively promoted in the early stages of its life cycle. Skimming pricing is effective for new and distinctive products due to the following reasons:

1. In the early stages, the product is distinctive, and imitation has not taken effect. Therefore, price is less likely to affect the sales volume, i.e., the demand is inelastic.
2. High prices in the initial stages will provide funds for expansion into the big volume segments of the market.
3. Skimming pricing takes the cream of the market before attempting to penetrate the more price-sensitive sections of the market.
4. The strategy can be used to fill out the market. It is easier to start out with a high initial price and reduce it later than to set a low price initially and then raise the price to cover unforeseen costs.
5. By setting the initial price high, the manufacturer can restrict demand to a level that he can meet. 

The skimming the cream strategy is likely to attract competitors, and as new firms enter to reap good profits, the price may have to be lowered.