Price skimming refers to a pricing strategy wherein the initial price set for a product or service is quite high. Over time, this high price will be slowly decreased. The rationale behind price skimming is that the manufacturer or service provider will be able to recover the cost at an early stage, especially since competition will probably be stronger as time passes by. In a sense, price skimming is a way of covering one’s bases early in the game.
One of the best examples of price skimming is what Sony did with the PlayStation 3. Everyone who is into video gaming can remember easily just how expensive the PlayStation 3 was when it first came out many years ago. Back then, the unit cost around $600 - an astronomical amount considering the product. Even then, there were people who did not hesitate to purchase the PlayStation 3. Over the years, however, the price of the PlayStation 3 - and its newer and better versions - went down. That is price skimming in all its glory.
While price skimming is a strategy that does work, it also has its limitations. For one, price skimming will not be effective if the demand curve is elastic. More so, price skimming might be considered illegal in certain locations. In some areas, price skimming is considered as price discrimination; as such, companies have to be careful when implementing this pricing strategy.
Another disadvantage that might occur due to price skimming is that the inventory turnover might be low, obviously because of the high initial price. Moreover, if the prices are lowered too quickly, the company might receive negative reactions from consumers, especially if the early birds feel that they have been ripped off.