What is skimming pricing method? What are its advantages and disadvantages?
Answers
This approach is used to generate substantial profits during the first months of the release of a product. ... Thus, price skimming tends to be a short-term strategy designed to maximize profits. When you engage in price skimming, the market size is small, since only early adopters are willing to pay the high price
Advantages of price skimming
Following are the important advantages of skimming the cream of the market.
1. High prices maximize the revenue available to the manufacturer.
2. Higher prices in the initial stage covers up development expenses which required to be incurred by the manufacturer.
3. Generally, it is easier to quote a higher price in the initial period and gradually reduce it to create a mass market for the product.
4. Skimming is advantageous where products are likely to become out of fashion within a short span.
5. As higher prices bring in large cash flows, funds will not be locked up. The exporter can employ the funds in other areas of market development.
Disadvantages of price skimming
1. High prices may not evoke quick sales.
2. As very few people buy the product, the brand loyalty of the product may suffer.
3. In the long run, people may shift their loyalty to low priced goods.
4. High profit margins lure competitors selling similar products.
5. Due to low demand for the product, economies of large scale production are not realizable.