Tuesday, March 2, 2010

Market - Skimming Pricing (Price Skimming)

According to the textbook "Marketing: An Introduction" by Armstrong and Kotler, market-skimming price or price skimming is a strategy of setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price; the company makes fewer but more profitable sales. Market skimming makes sense only under certain conditions: the product's quality and image must support its higher price, the costs of producing a smaller volume cannot be so high that they cancel the advantage of charging more, and finally, there should be a high entry barrier of the industry.

An example that would fall under this category is Amazon-Kindle unveiled by Amazon. Amazon's first offering of Kindle in November 2007 sold out in five and a half hours, and the device remained out of stock for five months until late April 2008.The original Kindle device features a 6 inch (diagonal) 4-level grayscale display, retailed for US $399. Amazon subsequently lowered the price to $359. The $40 drop brings the Kindle down from the initial $400 price it was introduced at. The price drop makes the Kindle even more compelling, that Amzon started to launch more typed of Kindle: Kindle 2, Kindle DX, and even Kindle 2 International Version. Amazon has not only applied the market skimming price strategy, it has also done a great strategy in selling this particular product. Amazon understands that the practice of ‘price skimming’ involves charging a relatively high price for a short time where a new, innovative, or much-improved product is launched onto a market. The objective with skimming is to “skim” off customers who are willing to pay more to have the product sooner; prices are lowered later when demand from the “early adopters” falls. When the demand from "early adopters" falls and more people eventually purchase Kindle with lower prices, Amazon then began to expand the product development by introducing more products still related to Kindle. This is even more of a strategic move by Amazon.

While the battle this year has seemed to focus on Amazon vs. Sony, the moves by Amazon appear to be part of a broader strategy to strike preemptively with a number of competing products hitting the streets. With the concept of market-skimming price, Amazon has a bright prospective in the development of its Kindle.

Clairine B. Runtung
Section G

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