Why companies drastically drop prices of costly products ?
Surjeet Singh an engineering student from Mumbai bought his first iphone 5s last year in October by spending a whopping Rs 68000. He devoted all his savings & even borrowed some thousands from his friends to get his dream device. After such a big investment, Surjeet virtually committed to keep the phone for at least next 2 years. But just after 60 days of the launch, the mobile phone maker slashed the price by almost 19% & eventually it goes to Rs 45000 in another next 60 days. Surjeet after seeing this value decline felt like cheated. His family & friends accused him of being bustle.
Now, what you think why this has happened? Whether the iphone 5s lower demand compelled the marketers to reduce its price or after 4 months, sellers decided to give such a big discount to the customers. The answer here is none of the above.
Being an MBA student or MBA graduate, you should examine the case of Surjeet from a business point of view.
Whenever a new product has been launched in the market with new technology & innovation, usually the price has been kept high. This high price supports the investment done by the manufacturer to develop new technology, advertisement & promotion of the new features of product, training of service & support teams and other miscellaneous costs. This pricing strategy is called as “Skimming price strategy” where manufacturer initially charges higher amount to skim the cream of the market by fulfilling the demand of a niche customer segment, thus recovering its investment cost at the same time & than lowering down the cost to reach the price sensitive customer segment.
Therefore, the case of Surjeet is not a cheating but a well-defined product pricing strategy where Surjeet, a price sensitive customer caught into the luxury of a niche customer segment.
Benefits of Skimming Price Strategy
- Recovery of initial investment
- Less competition
- High quality perception