Price skimming is a pricing strategy used by businesses where they initially set a high price for their new product or service and gradually lower it over time. This approach is used to maximize profits during the introduction or launch of a new product or service.
The purpose of price skimming is to take advantage of the price inelasticity of customers, who are willing to pay a premium for a new and innovative product. The pricing strategy also allows businesses to recover the costs associated with product development and marketing in the early stages.
The components of price skimming include the development and launch of a new product, the setting of a high price, and a gradual reduction in price over time to attract a wider range of customers. The importance of price skimming lies in the potential to generate high profits in the early stages of a product's lifecycle.
The history of price skimming dates back to the 1950s, when it was first used in the technology industry. Since then, it has been widely used in various industries, such as fashion, cosmetics, and electronics.
The benefits of price skimming include higher profits in the early stages of a product's lifecycle, a perception of higher quality for the product, and the ability to recover development costs. However, there are also some drawbacks, such as a limited market size and potential damage to the company's reputation if customers perceive the high initial price as unfair.
An example of price skimming is Apple's iPhone pricing strategy, where they initially set a high price for their new models and gradually lower it over time.