What is the essence of price skimming?

Price skimming is a strategy where a company sets a high price for a new product to maximize profits from consumers willing to pay the premium, often before gradually lowering the price over time to attract more price-sensitive customers. This approach is particularly effective for new and innovative products where consumers perceive high value.

Setting a high initial price allows the company to recover development and marketing costs quickly, while also capitalizing on the limited supply of the product. As the market matures and competition increases, the price can be reduced to appeal to a broader audience. This strategy is commonly used in technology markets, where early adopters are typically willing to pay more for the latest innovations.

In contrast to the other options, which focus on different pricing strategies, price skimming is distinctly characterized by its initial focus on a high price point. Setting a low price to attract many customers is a penetration pricing strategy, while offering discounts aims to boost demand through short-term incentives. Utilizing cost-based pricing exclusively does not consider consumer demand at varying price levels, which is critical in a skimming approach.