Price skimming is a strategy used by companies to maximize revenue when launching a new product. It involves setting a high initial price for the product and gradually lowering it over time. This pricing strategy is most commonly used for products that are innovative and have limited competition in the market.
While price skimming involves setting a high initial price and gradually lowering it over time, market penetration pricing involves setting a low initial price to attract customers and gain market share. Market penetration pricing is often used when there are many competitors in the market.
Price elasticity refers to the responsiveness of customers to changes in price. When using price skimming, companies must be aware of the price elasticity of their product in order to determine how much they can charge initially before sales start to decline.
The product lifecycle refers to the stages a product goes through from introduction to decline. Price skimming is typically used during the introductory stage of a product's lifecycle when demand is high and competition is low. As the product moves through its lifecycle, the pricing strategy may need to be adjusted accordingly.
Companies use price skimming because it allows them to maximize revenue during the introductory stage of a new product. This strategy can also help companies recover research and development costs quickly.
Apple is one example of a company that has successfully used price skimming with its iPhone products. Another example is Tesla, which used price skimming with its Model S electric car.
One potential drawback of using price skimming is that it may discourage some customers from purchasing the product initially due to the high cost. Additionally, as competitors enter the market, the company may need to adjust its pricing strategy to remain competitive.
