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Advantage & Disadvantage of Price Skimming

Advantage & Disadvantage of Price Skimming

  • Submitted By: smokindick
  • Date Submitted: 07/27/2011 7:08 AM
  • Category: Business
  • Words: 315
  • Page: 2
  • Views: 1622

here are few advantage and disadvantages for any high-tech product which are being introduced in the market by implementing skimming strategy.

Advantages:

R&D costs of an innovative product as iPad are likely to be high, so are the costs of introducing the product to the market via promotion, advertising etc., the practice of price-skimming allows the company to gain significant amount of return on the set-up costs.
By charging higher price in the introductory stage, Apple can build a high-quality image for its product. Charging initial high prices allows the firm the luxury of reducing them when the threat of competition arrives.
Price skimming helps in segmenting the market and can be lowered to suit each segment which helps the company to satisfy the demand of each segment (Armstrong & Kotler, 2011).

Disadvantages:
This strategy is practical only when the product has an inelastic demand curve. If in the long run demand curve turns elastic then market equilibrium will be attained by quantity changes instead of price changes (Pindyck and Rubinfield, 2005).
Skimming attracts competitors. The high margins compel them to enter onto the market as soon as possible.
Skimming results in a slow rate of stuff diffusion and adaptation. This results in a high level of untapped demand; which in turn gives competitor time to either imitate the product or leap frog it with a new innovation. The iPad prices and gaps in functionality were expected to leave the door open for other media tablet vendors (Eaton and Robischon, 2010).
The process of lowering of price for iPad should be done at an appropriate time. If lowered too soon early adopters could feel cheated. As a result the company and its brand name could suffer. In other sense, if customers had waited a little longer before buying iPad product, this would have helped them to make a better deal.

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