What does 'price skimming' mean in marketing?

Price skimming is a marketing strategy where a company sets a high initial price for a new or innovative product, targeting customers who are less price-sensitive and willing to pay a premium for being among the first to own or experience the product. Over time, as demand from this segment decreases, the business gradually lowers the price to attract more price-sensitive customers, thus maximizing revenue across different market segments.

This strategy is particularly effective for products with a unique selling proposition or those that are new to the market, allowing companies to recover development costs quickly before the market becomes more saturated. The gradual lowering of prices helps to maintain interest in the product over time and can also prevent competitors from immediately entering the market with lower-priced alternatives.

In contrast, the other options represent different pricing strategies that do not align with the concept of price skimming:

• Setting prices low to attract customers aligns more with penetration pricing, aimed at quickly gaining market share.

• Adjusting prices based on competitor prices refers to competitive pricing strategies, which do not incorporate the element of starting high and then lowering.

• Temporary price reductions to boost sales are promotional pricing tactics and do not reflect the long-term strategy of price skimming.