Price skimming

Definition

Price skimming is a pricing strategy where a company sets a high price for a new product or service initially and then gradually lowers the price over time. This approach allows businesses to maximize profits from early adopters who are willing to pay more before attracting a broader customer base with lower prices. In hospitality and tourism, this strategy is particularly relevant when launching new offerings, like luxury hotel services or exclusive travel packages.

5 Must Know Facts For Your Next Test

1. Price skimming is effective for innovative products or services that have little to no competition at launch.
2. The initial high price targets consumers who are less price-sensitive and eager to have the newest offering.
3. Over time, as competition increases and market saturation occurs, prices are lowered to capture more price-sensitive customers.
4. This strategy can help recover development costs quickly and increase profitability before competitors enter the market.
5. Price skimming is often seen in sectors like technology, entertainment, and luxury travel, where exclusivity and perceived value drive demand.

Review Questions

• How does price skimming benefit a new hospitality service during its initial launch phase?
  • Price skimming allows a new hospitality service to capitalize on the willingness of early adopters to pay higher prices for novel offerings. This approach helps the business quickly recover initial investment costs and maximize profits from customers who perceive high value in the new service. As the service gains traction and attracts more customers, the price can be lowered to appeal to a broader audience, ensuring sustained revenue growth.
• Compare price skimming and market penetration pricing in the context of launching a new hotel.
  • Price skimming focuses on setting an initially high price for a new hotel to target affluent customers who value exclusivity, thereby maximizing revenue from early sales. In contrast, market penetration pricing involves starting with a low price to attract a larger customer base quickly. While skimming aims for higher margins initially before lowering prices, penetration seeks rapid market share growth from the outset. The choice between these strategies depends on the hotel's positioning and target market.
• Evaluate the long-term implications of using price skimming as a strategy for a boutique hotel entering a competitive market.
  • Utilizing price skimming as a strategy for a boutique hotel can lead to significant short-term profits as early adopters flock to experience the unique offerings. However, in the long run, it may create challenges if competitors quickly adopt similar strategies or if consumer expectations shift towards lower pricing due to market saturation. The hotel must carefully manage its brand image while transitioning prices downwards to maintain occupancy rates without undermining its perceived value. Ultimately, balancing exclusivity with competitive pricing will be critical for sustained success in a crowded marketplace.

Related terms

market penetration pricing: A pricing strategy where a company sets a low initial price for a new product to attract customers quickly and gain market share.

dynamic pricing: A flexible pricing strategy that adjusts prices based on current market demands, competitor pricing, and other factors.

product lifecycle: The stages a product goes through from introduction to decline, which can impact pricing strategies, including price skimming.