Price Skimming

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Definition of 'Price Skimming'

Price skimming is a pricing strategy in which a company charges a high price for a new product or service. The company then lowers the price over time as the product or service becomes more popular.

Price skimming is often used by companies that want to recoup their research and development costs quickly. It can also be used to create an image of exclusivity for a product or service.

Price skimming can be effective in generating early revenue for a new product or service. However, it can also backfire if the price is too high and consumers are unwilling to pay it.

There are several factors to consider when using price skimming. These include the product or service's target market, the competition, and the company's financial goals.

If the target market is price-sensitive, then a high price may deter sales. In this case, a company may want to use a different pricing strategy, such as penetration pricing.

If the competition is offering a similar product or service at a lower price, then a company may need to lower its price to remain competitive.

Finally, a company's financial goals will also affect the price skimming strategy. If the company needs to recoup its research and development costs quickly, then it may need to charge a high price. However, if the company is more concerned with long-term growth, then it may want to use a lower price to attract more customers.

Price skimming is a complex pricing strategy that can be effective in some situations but not in others. Companies should carefully consider all of the factors involved before using price skimming.

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