Market skimming is a pricing strategy that involves setting a high initial price for a product and gradually lowering it over time to attract different segments of the market. This article discusses the advantages and disadvantages of using market skimming as a pricing strategy.
Advantages
| Advantages | Explanation |
|---|---|
| Maximizes profit | Market skimming allows businesses to maximize their profits by capturing the segment of the market that is willing to pay a premium price for the product. This initial high price helps companies recover their research and development costs, making it a lucrative strategy. |
| Creates perception of exclusivity | By setting a high initial price, market skimming creates a perception of exclusivity and premium quality. This can attract customers who are willing to pay a higher price for the privilege of owning a unique or superior product. |
| Targeted marketing | Market skimming enables businesses to target specific market segments and tailor their marketing efforts accordingly. By focusing on customers who are willing to pay a higher price, companies can develop marketing strategies that resonate with these customers and drive sales. |
Disadvantages
| Disadvantages | Explanation |
|---|---|
| Market entry barriers | The high initial price set in market skimming strategy may deter price-sensitive customers, creating barriers to market entry for these customers. This can limit the potential customer base and result in slower market penetration. |
| Competition | As the market skimming strategy involves lowering prices over time, it may attract competitor attention. Competitors may mimic the product or offer similar products at lower prices, eroding the price advantage of the skimming strategy. |
| Limited market share | By targeting a specific segment of the market willing to pay a premium price, market skimming may limit the overall market share a business can acquire. This strategy may not work effectively in highly competitive industries where price sensitivity is prevalent. |
Understanding the advantages and disadvantages of market skimming can significantly benefit businesses in their pricing and marketing strategies.
By leveraging the advantages of market skimming, companies can generate higher profits and build a perception of exclusivity around their products. The targeted marketing approach allows businesses to develop tailored strategies that resonate with their premium customers.
However, it is important to be aware of the disadvantages of market skimming. The high initial price may deter price-sensitive customers, limiting market entry. Additionally, competition may undermine the price advantage over time, and the strategy may not be effective in highly competitive industries.
By considering these pros and cons, businesses can make informed decisions about whether market skimming is the right pricing strategy for their products and target market.