Shawn has a masters of public administration, JD, and a BA in political science.
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.
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.
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.
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.
After about six months on the market, you drop the price to $99.99 based upon marketing research. While your profit margin has declined, the sales volume increases tremendously as the great bulk of consumers will now consider purchasing the device. About two years after introduction, you pull the product from the regular retailers and send them off to discounters where you sell the product for $19.99 to capture the remaining discount shoppers. The product will be off the market in six months, which is about the time you will introduce the new and improved version to the market.
Price skimming is a pricing strategy that involves utilizing different price points for a product that closely tracks the product's life cycle. The price is set the highest when the product is introduced, to maximize profit margins as early adopters purchase the product. When sales drop off, you enter phase two where the price is dropped to an attractive level for most members of your target market. When the product starts to decline, you will drop the price yet again to grab the discount hunters before you remove the product from the market.
- price skimming: a pricing strategy employed by some businesses that involves the use of different prices for the same product over time to generate profits
- life cycle: phases of a product's existence that includes introduction, growth, maturity, and decline
Review this lesson on price skimming and ensure that you can easily:
- Define price skimming
- Highlight the three phases of this strategy
- Go over and understand an example of price skimming
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Price Skimming: Definition, Examples & Strategy Quiz
Instructions: Choose an answer and click 'Next'. You will receive your score and answers at the end.
Who's the target consumer during phase one?
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