Price skimming is a pricing strategy which companies adopt when they launch a new product, in this strategy while launching a product company sets high price for a product initially and then reduce the price as time passes by so as to recover 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. Given below are some of the advantages and disadvantages of price skimming –
Advantages of Price Skimming
- Price skimming helps the company in recovering the research and development costs which are associated with the development of new product.
- If the company caters to consumers who are quality conscious rather than price conscious than this type of strategy can work in a great way for a company.
Disadvantages of Price Skimming
- This strategy can backfire if there are close competitors and they also introduce same products at 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.
- Price skimming is not viable option when there are strict legal and government regulations regarding consumer rights.
- If the company has history of price skimming than consumers will never buy a product when it is newly launched, they would rather wait few months and buy the product at lower price.