Price Skimming - Explained
What is Price Skimming?
Written by Jason Gordon
Updated at September 28th, 2021
- Marketing, Advertising, Sales & PR
- Accounting, Taxation, and Reporting
- Professionalism & Career Development
-
Law, Transactions, & Risk Management
Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
- Business Management & Operations
- Economics, Finance, & Analytics
- Courses
What is Price Skimming?
Price skimming is setting a product's initial price high and then gradually lowering it over time to maximize total profit. Now this may sound strange, but it's a common strategy with new products (especially techno technology-related products). In the below video, I sketch this out for you.
The key is that as time goes by we're going to change our price. We're going to start pretty high, so what we hope to see is that some people will buy at this high price.
Think about a new video game system. Some people will buy it as soon as it comes out at whatever price. Some people will say that's too high and they won't buy. Those that will pay that high price and the company captures a large profit margin on those that are sold.
Then what happens is we drop the price, and time is going on or going by but also more people are buying. So at price two there's a different set of people willing to pay that price and, therefore, willing to buy our product.
Then maybe a little more time passes, and we drop down to our final price. We get that last group of people to buy and now what we have achieved is that each group of people has paid the highest price that they were willing to pay. In other words, we have maximized our profit over the course of time.
Related Topics
- What is the Right Price for a Product?
- Competition-Driven Pricing
- Profit-Oriented Pricing Strategy
- Sales-Oriented Pricing Strategy
- Status Quo Pricing Strategy
- Value-Based Pricing Strategy
- Penetration Pricing Strategy
- Manufacturers Suggested Retail Price (MSRP) Definition
- Markdown
- Price Skimming
- Why Give Discounts?
- Trade Allowances
- Charging for Product Transportation
- Legal Issues with Pricing
- What is Product Dumping?
- What is Price Fixing?
- Why is Price Fixing Harmful?
- What is Price Discrimination?
- Why Pricing Discrimination is Harmful