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Definition: Creaming Pricing Strategy
Creaming or skimming is a type of pricing strategy in which the company which has a new or unique product sells it at a premium expecting to be forced to lower prices in the future when rival companies are able to come up with an alternative product. This alternative product or substitute may or may not be a replica of the previously new or unique product. When finally the substitute product enters the market, the firm will have already 'creamed' the market.
In creaming, goods are sold at higher prices resulting in lower sales. This sacrifice is made to gain high and quick profits. This method is often used to reimburse the cost of investment of the original research into the product. It is most commonly seen in the case of electronic markets. For example, when the Apple iPod was launched, it was sold at a considerable premium due to its uniqueness in the music player market. However, with the introduction of similar music players and even cheaper smartphones, their prices were lowered. This strategy is often used to target "early adopters" of a product or service who tend to have lower price-sensitivity as their need for the product is high and they often have a greater understanding of the product's value.
This technique is also used for example, in new computer game consoles that are often launched at high prices, before having their prices cut after several months. It is also seen in the case of prices for DVDs or Blurays of movies - which often see their prices lowered upon the release of substitutes like newer movies.
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