Price skimming

Producers of mobile phones, digital cameras, flat screens and similar hi-tech products often have to pump huge budgets into R&D. To get this investment back – and break even as quickly as possible – they tend to “price skim”.

This involves using high prices to remove the “cream” from the market before the competitors catch up. Thankfully innovators are willing to pay more – as we saw with the iPod, the iPad, etc. When the competition catches up, prices go down, by which time you’ve broken even (hopefully) by drinking the rich cream, leaving only promotion price levels for the rest.

If customers are switched on and can wait for the product life cycle to move on (probably meaning they’re not innovators, not even fast-followers, but part of the majority – and maybe even the late majority), then you could get a good deal on a snazzy piece of equipment. Even though it’s no longer the latest cutting-edge technology.

Some German product review specialists now help you track price skimming strategies as they happen, helping you catch products on promotion – before their short product life cycle ends.

Source: chip online

Note the GRAPH in the bottom left-hand corner. Now that’s what I call a price collapse. Or the end of the skimming phase.