Define price skimming and outline when it is suitable.

Define price skimming and outline when it is suitable.

• A. Low price to recover development costs
• B. High initial price to recover development costs
• C. Charging price equal to competitors
• D. Price random

Answer: (B)

Price skimming means charging a high initial price when a new product is launched, with the goal of recovering development costs and capturing profits from those willing to pay more before other options enter the market. This works best when the product is innovative or differentiated, there are few close substitutes, and there are powerful early adopters who value the unique features and are less price-sensitive. It also helps if the market can be segmented by willingness to pay, if supply is limited or production costs are high, and if the product has a relatively short life cycle so prices can be stepped down later to reach more price-sensitive buyers. The other approaches don’t fit price skimming: setting a low price to recover development costs aligns with penetration pricing, which aims to win share quickly rather than maximize early profits. Pricing to match competitors reflects competitive parity rather than extracting premium value. A random price has no strategic basis and misaligns with how price skimming targets disciplined, premium positioning.

Price skimming means charging a high initial price when a new product is launched, with the goal of recovering development costs and capturing profits from those willing to pay more before other options enter the market. This works best when the product is innovative or differentiated, there are few close substitutes, and there are powerful early adopters who value the unique features and are less price-sensitive. It also helps if the market can be segmented by willingness to pay, if supply is limited or production costs are high, and if the product has a relatively short life cycle so prices can be stepped down later to reach more price-sensitive buyers.

The other approaches don’t fit price skimming: setting a low price to recover development costs aligns with penetration pricing, which aims to win share quickly rather than maximize early profits. Pricing to match competitors reflects competitive parity rather than extracting premium value. A random price has no strategic basis and misaligns with how price skimming targets disciplined, premium positioning.