Price Skimming: Definition, Examples & Strategy Video

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Lesson Transcript
Instructor: Shawn Grimsley
If you pay close attention to prices at retail stores, you may have witnessed price skimming. In this lesson, you'll learn about price skimming, it's overall strategy, and see some examples of it. A short quiz follows.

Definition and Phases of Price Skimming

Price skimming is a pricing strategy employed by some businesses that involves using different prices for the same product over time to generate profits. The profit margin at each pricing phase will be different.

You can generally divide price skimming into three distinct phases. Let's look at each.

Phase One

During the first phase, the product is set at its highest price. This usually occurs during the product's initial launch when the company is targeting early adopters - those people that just have to have the latest and greatest thing, like the latest smartphone, and price isn't too much of a concern. The company's market share during this phase will not be that great, but its profit margins will be as high as they ever will be.

Phase Two

The second phase occurs when the early adopters have made their purchases, and it's time to increase your market share by getting a larger cross-section of your target market. You do this by decreasing the price sufficiently to induce a reasonable percentage of your target market to consider the purchase of your product. Your profit margin will decrease, but your sales volume and market share will increase.

Phase Three

Finally, when sales have started to decline, it's time for the third phase where the price is reduced even further to attract discount shoppers. Again, the profit margin will decrease. The product is probably near the end of its life cycle as it enters this phase of pricing. If the strategy is employed properly, you should reach most of your target market after completing all three phases.

The three pricing phases usually follow a product's life cycle fairly closely. A product life cycle includes introduction, growth, maturity, and decline. Phase one relates to introduction of the product, phase two follows the product through its growth and maturity, and phase three is utilized during the product's decline.

Example of Price Skimming

Let's say that you just came out with a brand new instant streaming device that allows viewers to watch anything on the Internet and from subscription services, such as Netflix, Hulu Plus, and Amazon Instant Videos, through the use of their television. You originally set the price at $150.00 because your marketing research indicates that is the typical price early adopters will be willing to pay.

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