7 Key excerpts on "Price Skimming"

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  eBook - ePub

  How to Price Your Product or Service Just Right

  • Barney Kemps(Author)
  • 2021(Publication Date)
  • Bibliomundi

    (Publisher)

  Price Skimming As a Pricing Strategy 

   

  Of all the marketing strategies you will use in your business, the pricing strategy is one of the most important. Along with choosing the right product, intelligent marketing, and a sound sales plan the correct price strategy will determine your revenues and market share. Usually the leaders in their industry use market skimming as a pricing technique.

   

  The strategy of a computer manufacturer is to come up with a new laptop every 8 months or so. He lowers the price of the older, unsold models (in their maturing stage) and keeps the price of the new laptops (in their introductory stage) higher. The new laptops will demand a higher price on the basis of their newer features.

   

  So the manufacturer is skimming the price (or skimming the market) at different stages – introductory, growth, maturity and decline. He gains the maximum profit through the highest price that each of these stages command.

   

  This strategy will work in a large market with sufficient buyers with a high product or service demand and a company with low cost structure. In the above example with laptops, the demand is high, there are plenty of recurring buyers with an industry which has a low cost structure that is technology enabled.

     

  Now the challenge for the company comes from the fact that there are quite a number of competitors in this market. If all of these competitors have a full line of similar products each with a varying life cycle buyers will find it extremely difficult to judge the product in terms of its quality or service or the value for price.

   

  Faced with a barrage of similar looking products the buyer will choose a laptop with maximum features at the lowest price. And if your company is not the one with the lowest price it may hurt its brand reputation for it will seem as if you have been overpricing products which will eventually lead to a drop of sales.

   

  Before any price strategy is chosen ensure that you first study the market carefully. One should have a clear idea about the customers' behaviour and the way in which the competitors will act or react. And this strategy should continually be tested while it is applied so as to ensure that the factors which led to this strategy have not changed over time with changing market conditions.

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  eBook - ePub

  Essentials of Marketing Management

  • Geoffrey Lancaster, Lester Massingham(Authors)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  Price Skimming is where the setting of a high initial price can be interpreted as an assumption by management that eventually competition will enter the market and erode profit margins. The company sets a high price so as to ‘milk’ the market and achieve maximum profits available in the shortest period of time. This ‘market skimming’ strategy involves the company estimating the highest price the customer is willing or able to pay, which will involve assessing the benefits of the product to the potential customer. This strategy has been successfully carried out by firms marketing innovative products that have substantial consumer benefits. An example of Price Skimming was Apple’s iPod. Launched in 2005, the initial price was set at £450. It now is possible to purchase variants of the iPod for less than £100.

  After the initial introduction stage of the product the company will lower the price of the product in successive stage so as to draw in the more price-conscious customers. When a company adopts this strategy the following variables are usually present:

  • demand for the product is high;

  • the high price will not attract early competition;

  • the high price gives the impression to the buyer of purchasing a high-quality product from a superior firm.

  Price penetration is the setting of a low price or the following of a ‘market penetration strategy’ by companies whose prime objective is to capture a large market share in the quickest time period possible. Conditions that prevail in such circumstances include:

  • price sensitive demand for the product;

  • a low price that will discourage competitors from entering the market;

  • potential economies of scale and/or significant experience curve effects; manufacture has to be large-scale from the outset;

  • a manufacturer prepared to wait longer to recoup capital investment costs.

  Pricing in the growth stage:

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  eBook - ePub

  Marketing

  • Paul Reynolds, Geoff Lancaste(Authors)
  • 2013(Publication Date)
  • Routledge

    (Publisher)

  A skimming strategy is directed at only a small proportion of the total potential market. This is likely to be made up of innovators and early adopters, who are receptive to new ideas and whose income and lifestyle makes them less sensitive to price (Figure 11.8). Diffusion theory, which is dealt with in the next chapter, suggests that these customer groups influence subsequent buyer categories, and acceptance of an innovative product ‘filters’ down to a larger number of consumers. In order to reach this wider group of customers, the company must plan to reduce prices progressively while at the same time ‘skimming’ the most advantageous prices from each successive customer group. The signal for each planned price reduction is a slowing down in sales. The price reductions are successively introduced until the product has ultimately been offered to the bulk of the overall target market. A variation of this market skimming approach is to launch a highly sophisticated version of a new product, and then reduce the price successively by producing cheaper, simpler, alternative or modified products at each successive stage of the strategy. For a skimming strategy to be successful, the product must be distinctive enough to exclude competitors who may be encouraged to enter the market by the high prices that a company is able to charge in the earlier stages. Other elements of the marketing mix should support the skimming strategy by promoting a high quality, distinctive image. The company must also be prepared and able to forgo high volume production in the initial stages of the product’s life, bearing in mind that overall the volume of sales and the price charged must be high enough to achieve profitability. Figure 11.8 illustrates that the first to adopt a new product (as first-time adopters and not replacement buyers) might be the upper middle social class A – which might well be the case in high fashion

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  eBook - ePub

  Entrepreneurship Marketing

  Principles and Practice of SME Marketing

  • Sonny Nwankwo, Ayantunji Gbadamosi, Sonny Nwankwo, Ayantunji Gbadamosi(Authors)
  • 2020(Publication Date)
  • Routledge

    (Publisher)

  The variable-cost pricing comprises only the direct costs, which are the direct costs of materials and direct labor costs. It is evident from the components of variable costs that a firm cannot survive using only variable-cost strategy. In practice, firms use variable-cost pricing for limited objectives and only for a short duration. They can, for example, be used to build traffic to the store, but manufacturers have to be ever so careful in using this strategy because they can be accused of predatory pricing, which is illegal in many jurisdictions. Firms use variable-cost pricing also for products that are being discontinued.

  Products can, in some extreme cases, be priced below cost. This strategy is sometimes referred to as distress pricing and used when a product has become obsolete. Under distress, pricing the product is simply priced at the cost of carrying it (that is, the cost of insuring the product and the space it occupies).

  PRICING STRATEGIES FOR NEW PRODUCT INTRODUCTION

  There are two primary new product introduction pricing strategies, which are known as skimming and penetration strategies. Skimming refers to new product introduction pricing strategy in which the initial price is high. This initial high price is lowered subsequently. There are several explanations for the use of skimming strategy. First, the innovating firm wants to recoup its investment in the new product as quickly as possible before competition sets in. Second, the innovating firm gets to enjoy economics of scale as the users of the new product grow in number. The firm then passes on to consumers, in the form of lower prices, the benefits (cost savings) of the economics of scale.

  It is also reasonable to expect the innovating firm to develop cost-saving methods as it gets more experienced in making the new product. In order not to be underpriced by competition, the innovating firm also passes along these cost savings to the consumer. The skimming strategy is common in industries where new inventions require a substantial investment, such as the high technology industry and the pharmaceutical industry. Recent examples of new products in the high technology industry where skimming strategy has been used include digital watches, calculators, cellular phones, and iPods. Examples of skimming in the pharmaceutical industry include penicillin, the entire class of cholesterol-lowering drugs, and patches for smoking cessation.

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  eBook - ePub

  CIM Coursebook: Delivering Customer Value through Marketing

  • Ray Donnelly, Colin Linton, Colin Linton(Authors)
  • 2010(Publication Date)
  • Routledge

    (Publisher)

  When the product moves into the decline stage, the organisation has a number of pricing options. It can increase the price in order to ‘milk’ the product. Alternatively, a price reduction could be initiated to slow the rate of decline.

  Pricing Strategies

  Organisations can adopt two generic pricing strategies: skimming and penetration. A comparison is shown in Table 4.2 .

  Table 4.2 Product pricing strategies

  Market skimming	Market penetration
  High price charged ‘Just’ worthwhile for some segments to adopt product Increased competition keeps price low	Low initial price charged Attracts large sales volumes quickly High sales volumes reduce costs Economies of scale achieved

  Skimming

  Skimming is where a high initial price is set to ‘skim’ income from those buyers who are prepared to purchase at this price. Buyers will be from small and profitable market segments. Apple launched its iPhone in this way, a high price was set and product availability was through a specific telephone network (rather than being available on all networks).

  Penetration

  Instead of charging a high price, the price is set below the price of any competing brands that may be in the market or about to enter the market. The intention here is to attract a large number of buyers in order to achieve a substantial share of the market quickly, or take share aware from competitors, or a combination of both.

  Pricing Frameworks

  There are three broad pricing frameworks strategies for pricing frameworks, summarised in Table 4.3 . These strategies help an organisation decide on the most appropriate way to price its existing products.

  Table 4.3 Pricing frameworks

  Pricing framework	Summary
  Cost based	There are two approaches: Cost plus and mark-up pricing
  Customer based	This includes: Psychological pricing, promotional pricing, differential, product-line and promotional pricing
  Competitor based	Pricing near or away from the competition
  Professional pricing	The price does not relate to the time taken providing the service

  Cost Based

  Here a specific sum of money or percentage is added to the cost of the product. This can be cost-plus, or mark up.

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  eBook - ePub

  The Strategy and Tactics of Pricing

  A Guide to Growing More Profitably

  • Thomas T. Nagle, Georg Müller(Authors)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  Skim pricing (or skimming) is designed to capture superior margins, even at the expense of large sales volume. By definition, skim prices are high in relation to what most buyers in a segment can be convinced to pay. Consequently, this strategy optimizes immediate profitability only when the profit from selling to relatively price-insensitive customers exceeds that from selling to a larger market at a lower price. In some instances, products might reap more profit in the long run by setting initial prices high and reducing them over time—the “sequential skimming” strategy we discuss below—even if those high initial prices reduce immediate profitability.

  Buyers are often price insensitive because they belong to a market segment that places exceptionally high value on a product’s differentiating attributes. For example, in many sports a segment of enthusiasts will often pay astronomical prices for the bike, club, or racquet that they think will give them an edge. You can buy a plain aluminum canoe paddle for $35. You can buy a Bending Branches Double Bent paddle (wood laminate, 44 ounces) for $149. Or you can buy the Werner Camano paddle (graphite, 26 ounces) for $249. The Werner Camano not only makes canoeing long distances easier but also signals that one belongs to a select group that has a very serious commitment to the sport.

  Of course, simply targeting a segment of customers who are relatively price insensitive does not mean that they are fools who will buy at any price. It means that they can and will pay a price that reflects a large portion of the exceptionally high value they place on the differentiating benefits they expect from the purchase. Thus skim pricing generally requires a substantial commitment to communicate why the differentiating features of the product or service can be expected to yield benefits that justify a high price to at least some customers. If effective value communications are neither practical nor cost-effective, then the firm must limit its pricing to reflect what it can communicate or to what potential customers are likely to believe simply from what they can observe.

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  eBook - ePub

  Strategies for High-Tech Firms

  Marketing, Economic, and Legal Issues

  • P.M. Rao, Joseph A. Klein(Authors)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  Apple introduced two iPhone models—4GB at $499 and 8GB at $599. Most of the iPhone users are relatively technology savvy and can afford to spend money on smart phones. Apple followed the skimming price strategy, but with a difference from the traditional way of skimming, which is to gradually reduce the price over PLC before extending the PLC with an improved version. Apple discontinued the $499 model and reduced the price of the premium model from $599 to $399. Moreover, every new generation model of the iPhone was introduced at either the same price as its predecessor or at a lower price—$399 (2002), $299 (2003), $299 (2004), and $249 (2005). The idea behind this strategy is to maintain sustained growth with improved and attractively packaged versions of the same product. Apparently the additional revenue net of cannibalization of older models from each new version far exceeds the additional cost of producing and marketing them. So rapid is Apple’s introduction of newer versions, competitors have little time to respond, especially in light of Apple’s formidable brand name and its many versions aimed at different segments of the market.

  PRICE DISCRIMINATION

  Price discrimination involves charging different prices to different customers for the same product when the cost of supplying different consumers is the same. Price discrimination also occurs when the cost of supplying a product to different customers varies, but the firm charges the same price. Price discrimination based on what consumers are willing to pay eventually results in greater profits than if the firm charged a single price to all customers.

  DEGREES OF PRICE DISCRIMINATION

  A perfectly discriminating monopolist charges a different price to each customer in order to maximize profits. This is known as first-degree price discrimination. However, this is not generally feasible. Second- and third-degree price discrimination are more common. Second-degree price discrimination refers to a case where every potential customer chooses from a menu of related products. This occurs when products like smart phones are sold in product lines or when products are sold in different versions, such as books that are available in hardcover or paperback. Third-degree price discrimination occurs when marketers charge different prices to different groups (segments)

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