Price skimming is a price strategy where firms charge high prices in the initial stage and lower their prices over time.
Price skimming can be used when a new product is introduced. As long as the competition has not entered the market, the firm can benefit from its monopoly position and generate high revenues by setting a high price. Once customer demand is satisfied and competition enters the market, the firm has to lower its price.
What to watch out for
Competitors will recognize that the one firm is benefiting from high profit margins in the market and therefore have an incentive to enter the market to benefit as well.
Price skimming can only be used as a strategy in a market with little to no competition.
If the firm sets prices too high, consumers may not be willing to buy the product. As a consequence, the firm cannot benefit from economies of scale because sales are too low.
Price skimming - Investopedia
Price Skimming - Corporate finance institute
Find out more about Pricing Methods
Competitive pricing is the process of selecting the optimal price points for a product or service, considering the pricing behavior of competitors ...
Economy pricing is a volume-based pricing strategy in which prices are set low and revenue is generated by the volume of products sold....
The basic idea of penetration pricing is to attract customers to a new product or service by offering a low price ...
Value-based pricing is a pricing strategy in which companies base their prices on the customer’s perceived value of a product or service ...
Cost-plus pricing describes the practice of setting the price based on the marginal cost of producing a good or service and adding a mark-up ...
If a pricing manager knows a product’s price elasticity, they can easily model the effects of a price change on sales, revenue, and profit for that product...
Unlike the other methods, behavioral pricing does not offer a full recommendation, but rather it is used in combination with other methods such as value-based pricing ...