Question

'Price skimming' is used :

• A. for a limited duration to recover most of the investment made to build the product.
• B. to attract new customers and increase market share or sales volume.
• C. for products and services where dickering over the price of goods is considered the norm.
• D. to cover the cost of producing a product plus a reasonable profit.

Hint:

Think of Skimming as “skimming the cream” off the top of the market. It is highly effective for revolutionary products (like new smartphones or high-end electronics) where customers are willing to pay a premium for novelty and status.

Answer 1

The Correct Option is A

Step 1: Defining Price Skimming:
Price skimming is a premium pricing strategy used by companies launching innovative, highly anticipated, or technologically advanced products.

Step 2: How Price Skimming Works:

• Initial Launch Phase: The firm sets a very high initial price to target less price-sensitive early adopters, maximizing profit margins from those eager to own the latest technology.
• Subsequent Phases: As demand from early adopters slows down and competitors enter the market, the company lowers the price in steps to attract more price-sensitive customer segments.

Step 3: Identifying the Primary Objective:
Setting a premium price at launch allows the company to quickly recover its research and development (R& D) and marketing investments before competitor products arrive. This matches option (A).

Step 4: Evaluating the Other Options:

• Option (B) describes Penetration Pricing (setting a low price to capture market share).
• Option (C) refers to bargaining or negotiation-based pricing.
• Option (D) describes Cost-Plus Pricing (adding a standard profit markup to unit costs).