What is meant by skimming pricing method? State any two advantages and any two disadvantages of skimming pricing method.

Question

Accepted Answer

Skimming pricing method (also called creaming) involves selling a product at a high price initially so that fewer sales are needed to break even. This strategy is commonly employed when a new product is launched — the cost of investment in original research is high and the product is aimed at consumers who are quality conscious rather than price conscious. The company gradually lowers the price over time to attract more price-sensitive segments.

**Two Advantages:**

1. It helps the company recover the high research and development costs associated with developing a new product, since the initial price is set high enough to cover these investments.

2. If the company caters to consumers who are quality conscious rather than price conscious, this strategy works very well in establishing a premium brand image and maximising profit margins in the early stage.

**Two Disadvantages:**

1. High initial prices may attract new competitors into the market who see the opportunity for high profit margins, increasing competition.

2. It may limit market penetration in the early stages since only a small segment of customers can afford the high price, resulting in slower sales volume growth compared to penetration pricing.