Price skimming

The levy strategy also Skimmingstrategie, ( engl. price skimming, by skimming for skim ) is a pricing strategy in which a product is first introduced with a high price, which will later gradually reduced (see price policy; classical pillar of the marketing mix ).

Skimmingstrategie and penetration strategy were first described by Joel Dean ( Managerial Economics, 1951). [Note 1]

Both are also referred to as sequence price strategies or dynamic strategies. It is in the Skimmingstrategie not a high-price strategy because the price is not recognized on a permanent high, but instead finds an explicit account of price changes over time.

The levy strategy is related to the term levy price.

Price skimming is not to be confused with Cream Skimming, be operated in which only certain customers (groups).

Principle

The price for a product is initially set high and corrected with increasing market penetration or by technical progress down. Due to the high initial price, although only lower volumes are usually achieved, but also realized relatively high contribution margins per unit time. The aim of the levy strategy is to pay for customers who are ready for a new product at a high price, this also " siphon off ", that is to keep the consumer surplus as small as possible.

The levy strategy is useful especially when it concerns with the new products for real innovations that are in high demand because of their novelty. Therefore, we call the first-time customers who pay the high price, even innovators or early adopters.

A classic example of the application of the levy strategies can be found on the hardware market ( graphics cards, hard drives ) or consumer electronics market (mobile phones, televisions ), here new, innovative products at relatively high prices are brought to the market, but after a short time (a few months to a year ) cheaper.

Theoretical economic background

Since the consumer willingness to pay the distributors is unknown, they can perform in order to obtain a partial indication of the willingness to pay for tradable goods moving no classification of consumers, for example by income, marital status, education and age. Only the initial cost reduction remains at a high level so as to cover the consumer with high willingness to pay. In contrast, such a classification is possible with immovable goods as in cinema, zoo, theater and so-called social prices, thereby providers a classifying price discrimination is allowed - but only if a sufficiently positive correlation between the classification features and the individual 's willingness to pay exists and further the standard deviation within a class with respect to that between classes is small.

Economies of scale

The positive economies of scale in consumption ( network effects ) should be minimal or even negative. This is the case, which have a status symbol character and would occur by mass possession a devaluation of the product, for example in luxury goods. The positive economies of scale of production should also be low, otherwise a price-setting at a lower level would reduce the burden of fixed costs, resulting in lower production costs would arise or falling variable costs in production recording time allowed for extremely declining cost trends. If, however, the positive economies of scale in production over time increase, such a strategy is again advantageous, as is the case in innovative production processes, which lead only after construction of production experience to falling production costs while increasing productivity.

There is a danger that become active as a latecomer due to the high price and the associated attractive unit profit competitors. Because of this risk, the barriers to entry for competitors must be increased. The barriers to market entry of competitors can be strengthened, for example through its own know- how advantage and an expansion of its market power.