Price Skimming Advantages and Disadvantages

Price skimming is a pricing strategy that companies adopt when they launch a new product, in this strategy while launching a product company sets a high price for a product initially and then reduces the price as time passes by so as to recover the cost of a product quickly. An example of price skimming would be mobiles which have some added features and due to those features, they are sold initially at higher prices, and then prices began to decline as time passes by, another example of price skimming would be 3D televisions which are right now being sold. In order to understand this concept in a better way, one should look at some of the advantages and disadvantages of price skimming –

Advantages of Price Skimming

Price Skimming Helps in Recovering R&D Costs

Price skimming helps the company in recovering the research and development costs which are associated with the development of new products and thus motivates the company employees and management to innovate more products and we all know that innovation is one of the pillars around which great companies are formed and survive.

Quality Conscious Customers

If the company caters to consumers who are quality conscious rather than price-conscious then this type of strategy can work in a great way for a company as quality-conscious customers never argue about price rather they argue only about quality and if you are giving quality product than the sky is the limit as far as pricing of the product is concerned.

Price Skimming Helps in Market Segmentation

Another advantage of price skimming is that it helps the company in segmenting the markets according to the price consumers are willing to pay for the product which in the future can help the company in introducing the higher-priced product to only those markets where the consumers are willing to pay a higher price and ignoring those markets where demand for higher-priced products is not there and thus saving a lot of marketing as well as logistics cost associated with marketing and delivery of products to such markets.

Disadvantages of Price Skimming

Competitors Angle

This strategy can backfire if there are close competitors and they also introduce the same products at a lower price than consumers will think that company always sells the products at higher prices which will result in consumers abandoning other products of the company also resulting in a fall in overall sales of the company and hence company should keep this aspect in mind before adopting this strategy.

Legal Aspect

Price skimming is not a viable option when there are strict legal and government regulations regarding consumer rights as the sentiment of both government as well as consumers will be against the company leading to a fall in goodwill and brand image of the company which in the long run can prove to a big problem for the company.

Company Pricing History

If the company has a history of price skimming then consumers will never buy a product when it is newly launched, they would rather wait a few months and buy the product at a lower price which in turn dilutes the whole concept of price skimming as the reason behind this strategy is to get maximum profit from initial sales and if that initial sales is not happening due to people waiting for the price to fall than the company will not be able to profit from this strategy

As one can see from the above that price skimming has advantages as well as disadvantages and that is the reason why any company thinking of using this strategy for its products should carefully read the above points and then only should take any decision regarding the pricing strategy of the company.