Price skimming involves setting a high price before other competitors come into the market.
This is often used for the launch of a new product which faces little or now competition – usually due to some technological features. Such products are often bought by "early adopters" who are prepared to pay a higher price to have the latest or best product in the market.
There are some other problems and challenges with this approach:
Price skimming as a strategy cannot last for long, as competitors soon launch rival products that put pressure on the price.
Distribution (place) can also be a challenge for an innovative new product. It may be necessary to give retailers higher margins to convince them to stock the product, reducing the improved margins that can be delivered by price skimming.
A final problem is that by price skimming, a firm may slow down the volume growth of demand for the product. This can give competitors more time to develop alternative products ready for the time when market demand (measured in volume) is strongest.
Get your copies of the superb teaching & learning resources provided to delegates at recent tutor2u CPD courses for A Level Business teachers.