What Are the Benefits of Price Skimming?

Pricing strategies are among the most important way a company competes in a market, primarily in order to induce consumer sales. One strategy when selling goods in a market is to use price skimming, where goods have high initial prices that fall over a given time period. Companies may lower a good’s price for any number of reasons, such as the entrance of consumers in a market or when consumers become more price sensitive for certain items. The benefits of price skimming include high profits, the creation of a sense of exclusivity, and control of the market. Like many strategies in business, the use of price skimming should be subject to change as the market shifts due to consumer demand or other factors.

Under some market conditions, the use of price skimming is a strategy to grab higher profits with a new or differentiated product. For example, a new piece of technology — whether hardware or software — may allow a company to set high prices due to lack of competition. This does not necessarily mean the new product was expensive to create; it just means a company can charge a high initial price due to the product itself. In some cases, a company charges these high prices to offset specific costs related to production, which in some cases, may be quite high. Either way, this can be a popular strategy to use at certain times.

Another benefit to a price skimming strategy is the creation of exclusivity for a certain product or service. In some consumers’ minds, a high price simply means that a good or service must have some special reason to command such a rate. The product may be of high quality, have a particular use, or simply be the only one of its kind in the market. Now, this does not necessarily mean the product actually provides better service to consumers than any other item. In fact, the item may not really be that valuable; the purpose of the price strategy is to simply create the perception of value in a consumer’s mind, which makes the individual purchase the item.

Companies can attempt to control a market through the use of price skimming. In some cases, a competitor may relate a high product price to an expensive cost of production. Or, a company that charges high prices for a certain set of goods is only seeking a niche market, which cannot support a high number of competitors. Either way, a company can use price skimming to glean profits while controlling a specific segment in the market.