Skimming Pricing

Definition

Skimming pricing is a pricing strategy where a company sets a high initial price for a new product or service in order to maximize profits during the early stages of the product's life cycle. This approach aims to skim the 'cream' of the market by targeting consumers who are willing to pay a premium for the product's novelty or innovative features.

5 Must Know Facts For Your Next Test

1. Skimming pricing is often used for innovative or high-end products that target early adopters and consumers with a high willingness to pay.
2. The goal of skimming pricing is to maximize profits in the short-term, rather than to maximize market share or long-term profitability.
3. Skimming pricing is most effective when a company can maintain its competitive advantage and prevent competitors from quickly entering the market.
4. As the product matures and the market becomes more saturated, the company may need to gradually lower prices to maintain sales and market share.
5. Skimming pricing is a common strategy for companies launching new products in the introduction stage of the product life cycle.

Review Questions

• Explain how skimming pricing relates to the entrepreneurial marketing mix.
  • Skimming pricing is a key component of the entrepreneurial marketing mix, as it allows entrepreneurs to maximize profits during the early stages of a product's life cycle. By setting a high initial price, entrepreneurs can target early adopters and consumers with a high willingness to pay, aligning with the 'price' element of the marketing mix. This strategy also supports the 'product' element, as it allows entrepreneurs to capitalize on the novelty and innovative features of their offerings. Additionally, skimming pricing can be used in conjunction with other marketing mix elements, such as 'promotion' to create a perception of exclusivity and premium value.
• Analyze how skimming pricing and market segmentation work together to support entrepreneurial marketing efforts.
  • Skimming pricing and market segmentation are closely related in the context of entrepreneurial marketing. By using skimming pricing, entrepreneurs can effectively segment the market and target the most profitable consumers - those willing to pay a premium for the product's novelty or innovative features. This approach allows entrepreneurs to focus their marketing efforts on the 'early adopter' segment, which is typically smaller but more lucrative. As the product matures and the market becomes more saturated, entrepreneurs may need to adjust their pricing and marketing strategies to reach a broader segment of the market, potentially transitioning to a penetration pricing model to gain market share.
• Evaluate the long-term implications of a skimming pricing strategy for an entrepreneurial venture.
  • While skimming pricing can be an effective short-term strategy for maximizing profits, it may have long-term implications for an entrepreneurial venture. By setting a high initial price, entrepreneurs risk limiting the product's accessibility and appeal to a wider customer base, which could hinder long-term growth and market share. Additionally, the high price point may attract competitors who are able to quickly enter the market and undercut the entrepreneur's offering. To mitigate these risks, entrepreneurs should carefully consider the product's life cycle, the competitive landscape, and the long-term viability of a skimming pricing strategy. Ultimately, the decision to use skimming pricing should be balanced with other marketing mix elements and the venture's overall strategic objectives.

Related terms

Penetration Pricing:

A pricing strategy where a company sets a low initial price for a new product or service in order to rapidly gain market share and discourage competition.

Product Life Cycle: The stages a product goes through from introduction to decline, including the introduction, growth, maturity, and decline stages.

Market Segmentation:

The process of dividing a market into distinct groups of customers with different needs, characteristics, or behaviors who might require separate products or marketing mixes.