Examples of Price Skimming

An example of price skimming is DVD players. Initially in 1990s when DVD players were launched the
price of a DVD player was $500 and $400. By 2001 the prices were skimmed to less than a $100. By 2004
DVD players were available for as low as $50 or $60.

Another example can be picked up from the computer industry where technology plays a significant role
in price skimming. When a new laptop is introduced with enhanced and unique features it is priced quite
high. The prices of older laptops now fall as the demand shifts to laptops showcasing new technology.

Advantages of Price Skimming

1. Price skimming helps in recovering the sunk costs. Sunk costs are costs incurred in past which
cannot be recovered. When a new and innovative product is launched its research and
development costs are usually high. Similarly a lot of promotion via advertising etc. is required
for its introduction to the market. The initial hike in price helps in recovering some of these
expenses.

2. Price skimming helps in segmenting the market. The price can be lowered to suit each segment
and thereby the demand of each segment is satisfied and the manufacturer makes maximum
profit from each of them.

3. The high price of the product brings huge benefits for the dealers as well. Since the prices are
high initially the manufacturer has the liberty of lowering it when competitors knock at the door.

4. If the product is positioned well then its buyers are more prestige conscious than price
conscious. Expensive goods easily attain the tag of being luxury items.

Disadvantages of Price Skimming

1. This policy is workable only when the product has an inelastic demand curve. For instance, price
changes have no effect on the demand for a life saving drug. The price may $100 or $50 people
 will buy it. If in the long run demand curve turns elastic then market equilibrium will be attained
by quantity changes instead of price changes.

2. It is difficult to maintain the stock for skimmed products. It isn’t an easy proposition for the
distribution chain. Retailers may ask for higher profit margins to continue distribution of
products.

3. Skimming attracts competitors. The high margins compel them to enter the market as soon as
possible.

4. The rate of diffusion is slow for skimmed products. The competitors take advantage of this
situation. They either turn copy cats and come out with similar cheaper products or go one step
further and introduce a similar product with enhanced features.

5. Lowering of price should be done at an appropriate time. If lowered too soon the early
customers feel cheated. They feel waiting for some more time before buying the product would
have helped them strike a profitable deal. As a result the company and its brand name suffer.

6. Inefficiency may creep into the firm. Due to high margins less effort is made to keep a check on
the costs.