Posted in Marketing and Strategy Terms, Total Reads: 876
Definition: Price Skimming
Price skimming is a pricing technique in which a high price is charged for a product once it is introduced and gradually the price is decreased as the demand becomes stable to attract more price sensitive customers.
This technique gets its name from Skimming, where first cream is withdrawn and later the thinner liquid. Here also first the surplus is tapped and later other customers who are willing to wait are catered to.
A very interesting example is when Harry Potter Books are first launched only hardbound books are sold which are relatively higher in price. Gradually as the initial consumer surplus is captured and pirated versions become available at lower prices, the price is decreased and normal bound books are launched to capture the price sensitive consumers.
Picture above from left to right shows normal version and hardbound version respectively
Objective is to obtain maximum revenue from the market by tapping the consumer surplus. As the Harry Potter books are launched, there are huge queues of Harry Potter fans outside stores to buy the book they have been waiting for. These customers have very high value for the book and are willing to pay higher price.
Below is the picture of queue when the last book of the series went on sale at midnight 20th July, 2007 at Edinburgh, Scotland.
Price Skimming is useful when:
• Customer perceived value is high
• Customer is willing to pay high
• There is no competition
• High price will not attract competition
• High price is interpreted by customers as a sign of quality
• Lowering the price would not majorly affect sales volume (inelastic demand)