Price Creaming or Price Skimming
Definition of Price Creaming or Price Skimming
A pricing strategy where a company begins by pricing an item at the largest cost that consumers are willing to pay for. With time, when the demand of those first consumers is fulfilled, the company begins to decrease the price in order to gain the attention of those who are price conscious.
Description of Price Creaming or Price Skimming
This pricing strategy often comes into effect when an item is going out into the market for the first time. Here, it doesn’t have much competition yet since it’s new and often has features that other items have never had before. Obviously, it’s going to be priced fairly high, so only those who live for getting things before others are willing to make that purchase.
For example, the Playstation 3 first came out with a cost of around $599 since it was the greatest, most revolutionary video gaming console at that time. However, now you can purchase it for under $200 because there are better consoles now available.
Advantages of Price Creaming or Price Skimming
When you initially price your item high, you give both the item and your company an image that of quality and exclusivity, which in turn, brings in your first customers. In fact, these are the consumers that don’t mind paying a little extra as long as they are the first ones with the item. Additionally, they could be used as a part of your marketing strategy; telling others about your item after they’ve gotten it.
It’s also beneficial when you’ve poured in a lot of money into the development of an item. You can use the extra money that you make from the initial high price, to pay off those expenses.
Disadvantages of Price Creaming or Price Skimming
It may be useful in the beginning, but overall, it’s just a quick fix. Yes, you may have made some profit from the initial consumers who were willing to purchase your item just so that they’d be the first ones with it, but then, when you start to try to cater those that are more price-conscious, you risk the chance of having rivals steal your sales as you lower your prices. However, let’s take another step back. Suppose your item is currently priced high; your rivals can pop up and start taking your customers with their lower prices, thus getting rid of your price skimming strategy from the beginning.
Also, beware of the fact that those who did buy your item at the initial price may get upset with the fact that now you’re offering the same item, but at a lower cost. That’ll affect your loyal customer base in the long run, so this is not a technique to utilize often.