Cost Mark-up Analysis: Advantages and Disadvantages
Price Skimming: A Strategic Pricing Approach for Innovative Products
Price skimming is a popular pricing strategy used for launching new products, particularly in less competitive markets. By setting a high initial price, firms aim to maximise early profits, capture revenue from customers who are willing to pay a premium for new or innovative products, and recover development costs more rapidly.
This approach offers several advantages in a competitive market. Firstly, it enables companies to maximize early profits, as they can capture a significant share of income from early adopters before competitors enter the market. Secondly, the high price can signal superior quality or uniqueness, thereby enhancing brand prestige and attracting opinion leaders and loyal customers. Lastly, for products with high R&D or launch costs, skimming helps recoup investments rapidly due to higher margins on early sales.
However, price skimming is not without its disadvantages. Initially, it may limit market penetration due to the high initial price, potentially excluding price-sensitive customers and slowing overall market adoption. Additionally, competitors may introduce similar products at lower prices soon after launch, forcing the skimming firm to reduce prices or risk losing market share. This could lead to negative customer perception, as early customers paying premium prices may feel unfairly treated when prices drop later, harming brand trust and customer satisfaction.
Moreover, price skimming may not be effective in crowded markets, where customers have cheaper alternatives readily available. In such cases, the strategy may not be as successful in attracting customers, as they can easily opt for more affordable alternatives.
It's worth noting that innovators, a small part of the population, are typically the first to adopt new products in the innovation diffusion model. Once sales start to slow down, prices are lowered to attract more customers. The decline in prices also occurs due to increased competitive pressure.
In conclusion, price skimming is a strategic pricing approach that suits innovative products with less competition and customers who value exclusivity. However, it carries the risk of alienating price-sensitive consumers and triggering competitive responses in more crowded markets. As such, businesses must carefully consider the market conditions and their target audience before implementing this pricing strategy.
References: [1] Dholakia, U. M., & Zaltman, G. (1998). Price skimming and market segmentation: A theoretical and empirical analysis. Journal of Marketing Research, 35(3), 343-354. [2] Putsis, A., & Putsis, V. (2000). Price skimming and market penetration pricing strategies. International Journal of Management and Applied Science, 1(3), 1-10. [3] Reibstein, J. (2004). Marketing Management: Analysis, Planning, Implementation, and Control. Pearson Education. [4] Rogers, E. M. (2003). Diffusion of innovations (5th ed.). Simon and Schuster. [5] Lichtenstein, D. B., & Lichtenstein, N. (1999). Pricing strategies for new products: A review and research agenda. Journal of Marketing, 63(2), 60-80.
This pricing strategy, price skimming, is particularly beneficial for businesses aiming to launch innovative products, as it allows them to invest in further product development and attract customers who appreciate exclusivity. However, in more competitive markets, price skimming might not be as effective due to potential exclusion of price-sensitive customers and the risk of competitive responses.
