Price Skimming

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DEFINITION of 'Price Skimming'

A product pricing strategy by which a firm charges the highest initial price that customers will pay. As the demand of the first customers is satisfied, the firm lowers the price to attract another, more price-sensitive segment.

Therefore, the skimming strategy gets its name from skimming successive layers of "cream," or customer segments, as prices are lowered over time.

BREAKING DOWN 'Price Skimming'

Firms often use this technique to recover the cost of development.

Skimming is a useful strategy when:
-There are enough prospective customers willing to buy the product at the high price.
-The high price does not attract competitors.
-Lowering the price would have only a minor effect on increasing sales volume and reducing unit costs.
-The high price is interpreted as a sign of high quality.

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