A pricing strategy whereby the firm charges the highest possible price when it enters a market, giving the company an opportunity to recover high development costs, is called:
options:
full cost pricing.
price skimming.
competition pricing.
predatory pricing.
The correct answer and explanation is:
The correct answer is price skimming.
Price skimming is a pricing strategy where a company initially sets a high price for a new product or service, particularly when it first enters the market. The primary objective of this strategy is to recover the high costs associated with product development, marketing, and research. This strategy is often employed when a company introduces an innovative or unique product that has little competition. It allows the company to capitalize on early adopters who are willing to pay a premium for being the first to own or experience the product.
Price skimming works well in markets where the product has a distinct competitive advantage, such as in the technology or pharmaceutical industries, where development costs are typically high. The high initial price helps maximize revenue from consumers who are less sensitive to price. Over time, the company may lower the price to attract a broader customer base and increase market penetration. This gradual price reduction helps the company reach different segments of the market, from early adopters to more price-sensitive customers.
This strategy also allows companies to create a perception of exclusivity or luxury around the product. For example, tech companies like Apple often use price skimming when launching new products like smartphones or laptops. Initially, the product is priced high to capture the most revenue from consumers willing to pay for early access, and later, as competition increases or market demand changes, the price may be lowered.
Unlike full cost pricing, which involves setting a price based on covering both fixed and variable costs, or predatory pricing, which involves setting low prices to eliminate competition, price skimming is designed to maximize revenue from high-income consumers at the initial stages of the product lifecycle.