pricing strategies - skimming

The practice of price skimming involves charging a relatively high price for a short time where a new, innovative, or muchimproved product is launched onto a market. The objective with skimming is to skim off customers who are willing to pay more to have the product sooner; prices are lowered later when demand from the early adopters falls. The success of a price-skimming strategy is largely dependent on the inelasticity of demand for the product either by the market as a whole, or by certain market segments. High prices can be enjoyed in the short term where demand is relatively inelastic. In the short term the supplier benefits from monopoly profits, but as profitability increases, competing suppliers are likely to be attracted to the market (depending on the barriers to entry in the market) and the price will fall as competition increases. The main objective of employing a price-skimming strategy is, therefore, to benefit from high short-term profits (due to the newness of the product) and from effective market segmentation. There are several advantages of price skimming Where a highly innovative product is launched, research and development costs are likely to be high, as are the costs of introducing the product to the market via promotion, advertising etc. In such cases, the practice of price-skimming allows for some return on the set-up costs By charging high prices initially, a company can build a high-quality image for its product. Charging initial high prices allows the firm the luxury of reducing them when the threat of competition arrives. By contrast, a lower initial price would be difficult to increase without risking the loss of sales volume Skimming can be an effective strategy in segmenting the market. A firm can divide the market into a number of segments and reduce the price at different stages in each, thus acquiring maximum profit from each segment Where a product is distributed via dealers, the practice of price-skimming is very popular, since high prices for the supplier are translated into high mark-ups for the dealer For conspicuous or prestige goods, the practice of price skimming can be particularly successful, since the buyer tends to be more prestige conscious than price conscious. Similarly, where the quality differences between competing brands is perceived to be large, or for offerings where such differences are not easily judged, the skimming strategy can work well. An example of the latter would be for the manufacturers of designer-label clothing.

Examples of price skimming

Price skimming has been used for certain high-end electronics. For instance, the Sony PlayStation 3 was initially sold at $599, but the price has gradually reduced to $299.

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Product Mix Pricing Strategies

When the product is a part of product-mix, there are five kinds of strategies involved: i. Product Line Pricing In product line pricing, management must decide on the price steps to set between various products in a line. This should take into account the differences in products features, customer evaluations, competitors prices etc. ii. Optional-Product Pricing The pricing of optional or accessory products along with the main product. For example, a car buyer may choose to order a CD changer as an optional product. iii. Captive-Product Pricing Setting a price for products which must be used along with the main product. For example, HP makes printers and cartridges. It makes very low margins on its printer (the main product) but very high margins on cartridges . iv. By-Product Pricing Setting a price for the by-products. Like in processing meats, petroleum products, chemicals etc. Using byproduct pricing, the manufacturer will find a market for the by-products and should accept any price that covers more than the cost of storing and delivering them. For example, at Alba, water is obtained as a by-product while manufacturing aluminum. This water can now be sold to the market. v. Product Bundle Pricing Combining several products and offering the bundle at a reduced price. For example, fast food restaurants bundle a burger, French fires and soft drink at a combo price.

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Product-mix pricing Price-setting logic must be modified when, the product is part of a product mix. In this case, the firm searches for a set of prices that maximizes profits on the total mix. Pricing is difficult because the various products have demand and cost interrelationships and are subject to different degrees of competition. We can distinguish six situations involving product-mix pricing: product-line pricing, optional-feature pricing, captive-product pricing, two-part pricing, by-product pricing, and product-bundling pricing. Product line Pricing - Companies normally develop product lines rather than sin-gle products and introduce price steps. In many lines of trade, sellers use well-established price points for the products in their line. A mens clothing store might carry mens suits at three price levels: Rs800, Rs.1500, and Rs.4500. Customers will associate low-, average-, and high-quality suits with the three price points. The sellers task is to establish perceived-quality differences that justify the price differences. Optional-feature pricing Many companies offer optional products, features, and services along with their main product. The automobile buyer can order electric window controls, defoggers, light dimmers, and an extended warranty. Pricing is a sticky problem; automobiles companies must decide which items to include in the price and which to offer as options. Restaurants face a similar pricing problem. Customers can often order liquor in addition to the meal. Many restaurants price their liquor high and their food low. The food revenue covers costs, and the liquor produces the profit. This explains why servers often press hard to get customers to order drinks. Other restaurants price their liquor low and food high to draw in a drinking crowd. Captive-product pricing Some products requires the use of ancillary, or captive, products.

Manufacturers of razors and cameras often price them low and set high markups on razor blades and film, respectively. A cellular service operator may give a cellular phone free if the person commits to buying two years of phone service. Two-part pricing Service firms often engage in two-part pricing, consisting of a fixed fee plus a variable usage fee. Telephone users pay a minimum monthly fee plus charges for calls beyond the minimum number. Amusement parks charge an admission fee plus fees for rides over a certain minimum. The service firm faces a problem sin1ilar to captive -product pricing-namely, how much to charge for the basic service and how much for the variable usage. The fixed fee should be low enough to induce purchase of the ser-vice; the profit can then be made on the usage fees. By-product pricing The production of certain goods- meats, petroleum prod-ucts, and other chemicalsoften results in by-products. If the by-products have value to a customer group, they should be priced on their value. Any income earned on the by-products will make it easier for the company to charge a lower price on its main product if competition forces it to do so. Product-Bundling pricing Sellers often bundle products and features. Pure bundling occurs when a firm only offers its products as a bundle. In mixed bundling, the seller offers goods both individually and in bun-dles. When offering a mixed bundle, the seller normally charges less for the bundle than if the items were purchased separately. An auto manufacturer might offer an option package at less than the cost of buying all the options separately. A theater company will price a season subscription at less than the cost of buying all the performances sepa-rately. Because customers may not have planned to buy all the components, the savings on the price bundle must be substantial enough to induce them to buy the bundle.
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