{"id":4496,"date":"2016-02-13T01:22:31","date_gmt":"2016-02-13T01:22:31","guid":{"rendered":"https:\/\/courses.candelalearning.com\/marketingxwaymakerxspring2016\/?post_type=chapter&p=4496"},"modified":"2016-02-18T18:22:49","modified_gmt":"2016-02-18T18:22:49","slug":"reading-skim-pricing","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/clinton-marketing\/chapter\/reading-skim-pricing\/","title":{"raw":"Reading: Skim Pricing","rendered":"Reading: Skim Pricing"},"content":{"raw":"[caption id=\"attachment_5929\" align=\"aligncenter\" width=\"500\"]\"A<\/a> A skimmer skimming[\/caption]\r\n

Introduction<\/h2>\r\nWith a totally new product, competition either doesn't exist or is minimal, and there's\u00a0no\u00a0market data about customer demand. How should the\u00a0price be set in such a\u00a0case? There are two common pricing strategies that organizations use for\u00a0new products: skim pricing and penetration pricing.\r\n

The Economics of Price and Demand<\/h3>\r\nIn order to understand\u00a0these pricing strategies,\u00a0let's review the demand curve. In a typical economic analysis of pricing, the demand curve shows the quantity demanded at every price. In our graph below, the demand increases by 100 units each time the price drops by $1. Based on this demand, if a company priced its product at $4, consumers would buy 200 units. If the company wanted to raise its prices, it could charge $5, but then consumers would buy only 100 units. This is an oversimplified example, but it shows an important relationship between price and demand.\r\n\r\n\"Demand<\/a>\r\n\r\nThe key\u00a0thing to understand about\u00a0this model is that when all else is equal, demand decreases as price increases<\/em>. Fortunately, the marketer does not have to regard\u00a0everything else as fixed. She can make adjustments to product, promotion, or distribution to increase the value to the customer in order to increase demand without lowering price. Still, once the other elements of the marketing mix are fixed, it's generally true that a higher price will result in less demand for a product, and a lower price will result in more demand for a product.\r\n

What Is Skim Pricing?<\/h3>\r\nPrice skimming <\/em>involves the top part of the demand curve. A\u00a0firm charges the highest initial price that customers will pay. As the demand of the first customers is satisfied, the firm lowers the price to attract another, more price-sensitive segment.\r\n\r\nUsing our example of the demand curve, the price might be set at $5 per unit at first, generating a demand of only 100 units.\r\n\r\n\"Price<\/a>\r\n\r\nThe skimming strategy gets its name from skimming successive layers of \"cream\"\u2014or customer segments\u2014as prices are lowered over time.\r\n

Why Might Skim Pricing Make Sense?<\/h3>\r\nThere are a number of reasons why an organization might consider a skimming strategy. Sometimes a company simply can't deliver enough of a new product to meet demand. By setting the price high, the company is able to maximize\u00a0the total revenue that it can generate from the quantity of product that it can make available.\r\n\r\n\"Marketing<\/a>\r\n\r\nPrice skimming can also be part of a customer segmentation strategy. Take a look at the graph, above. You'll remember from our discussion of the product life cycle and customer adoption patterns\u00a0that the Innovators\u2014the adventurous customers on the left who are game\u00a0to try new products\u2014are less price sensitive and place a premium on being first to own a new product. A\u00a0skim-pricing strategy targets these customers and sets\u00a0a higher price for them. As the product starts to move through the Early Adopters stage, the marketer will often reduce the price to begin drawing Early Majority buyers.\r\n\r\nA skimming strategy is most appropriate for a\u00a0premium product. Today we can see many examples of skim pricing in the electronics industry when new product innovations are introduced. Electronics companies know that many buyers will wait to purchase new technologies, so\u00a0they\u00a0use skim pricing to get the highest possible price from the Innovators and Early Adopters.","rendered":"
\"A<\/a><\/p>\n

A skimmer skimming<\/p>\n<\/div>\n

Introduction<\/h2>\n

With a totally new product, competition either doesn’t exist or is minimal, and there’s\u00a0no\u00a0market data about customer demand. How should the\u00a0price be set in such a\u00a0case? There are two common pricing strategies that organizations use for\u00a0new products: skim pricing and penetration pricing.<\/p>\n

The Economics of Price and Demand<\/h3>\n

In order to understand\u00a0these pricing strategies,\u00a0let’s review the demand curve. In a typical economic analysis of pricing, the demand curve shows the quantity demanded at every price. In our graph below, the demand increases by 100 units each time the price drops by $1. Based on this demand, if a company priced its product at $4, consumers would buy 200 units. If the company wanted to raise its prices, it could charge $5, but then consumers would buy only 100 units. This is an oversimplified example, but it shows an important relationship between price and demand.<\/p>\n

\"Demand<\/a><\/p>\n

The key\u00a0thing to understand about\u00a0this model is that when all else is equal, demand decreases as price increases<\/em>. Fortunately, the marketer does not have to regard\u00a0everything else as fixed. She can make adjustments to product, promotion, or distribution to increase the value to the customer in order to increase demand without lowering price. Still, once the other elements of the marketing mix are fixed, it’s generally true that a higher price will result in less demand for a product, and a lower price will result in more demand for a product.<\/p>\n

What Is Skim Pricing?<\/h3>\n

Price skimming <\/em>involves the top part of the demand curve. A\u00a0firm charges the highest initial price that customers will pay. As the demand of the first customers is satisfied, the firm lowers the price to attract another, more price-sensitive segment.<\/p>\n

Using our example of the demand curve, the price might be set at $5 per unit at first, generating a demand of only 100 units.<\/p>\n

\"Price<\/a><\/p>\n

The skimming strategy gets its name from skimming successive layers of “cream”\u2014or customer segments\u2014as prices are lowered over time.<\/p>\n

Why Might Skim Pricing Make Sense?<\/h3>\n

There are a number of reasons why an organization might consider a skimming strategy. Sometimes a company simply can’t deliver enough of a new product to meet demand. By setting the price high, the company is able to maximize\u00a0the total revenue that it can generate from the quantity of product that it can make available.<\/p>\n

\"Marketing<\/a><\/p>\n

Price skimming can also be part of a customer segmentation strategy. Take a look at the graph, above. You’ll remember from our discussion of the product life cycle and customer adoption patterns\u00a0that the Innovators\u2014the adventurous customers on the left who are game\u00a0to try new products\u2014are less price sensitive and place a premium on being first to own a new product. A\u00a0skim-pricing strategy targets these customers and sets\u00a0a higher price for them. As the product starts to move through the Early Adopters stage, the marketer will often reduce the price to begin drawing Early Majority buyers.<\/p>\n

A skimming strategy is most appropriate for a\u00a0premium product. Today we can see many examples of skim pricing in the electronics industry when new product innovations are introduced. Electronics companies know that many buyers will wait to purchase new technologies, so\u00a0they\u00a0use skim pricing to get the highest possible price from the Innovators and Early Adopters.<\/p>\n\n\t\t\t

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CC licensed content, Original<\/div>