Denise Ruiz Aguiar
Price skimming is a business technique which involves charging a high price for a product when it is released initially, andgradually lowering the price over time. The goal of this practice is to ensure that the price matches consumer willingness to pay, generating profits for the company both over time and in the shortterm. The “skimming” is a reference to a stage in milk processing in which the cream is repeatedly skimmed from the top, yielding milk with a steadily lower butterfat content, much as price skimmingcreates a steadily cheaper product.
There are a number of reasons for companies to utilize price skimming, beyond the simple desire for profits. One of the most basic motivations is the desire to recoupthe investment involved in product development before competitors hit the market and make high prices unsustainable. For example, if a company develops a totally new and innovative product, it mayspend a great deal of money in the process of designing and marketing the product, and it wants to recover this money quickly to make the product profitable.
Another reason involves consumerpsychology. Many people attach certain values to high priced products, including luxury, exclusivity, and quality. By releasing a product with a high price, the manufacturer sends a message toprestige-conscious consumers, ensuring that they will flock to buy their product. Even as the price drops, people will continue to associate these values with the product, creating a steady demand for it.
Priceskimming relies heavily on early adopters who are willing to pay a high price to be the first to have a new product. As the product spreads among these early adopters, the producer can slowly lower theprice as people become less willing to pay top dollar for the product. Ideally, the producer will remain competitive with the inevitable rival products released by other companies. Supply and demand...