Cream skimming pricing

Cream skimming is another pricing strategy that is used extensively in the high-tech markets. When a manufacturer introduces a new product, the price is initially set at a high level. Over time, as the new product becomes more widely accepted, the price is gradually reduced. Again the PC market offers an excellent example. As every new generation of faster processor is brought to market, prices of the older processors are gradually reduced to make them more widely available. This allows the manufacturer to recover its development costs at the beginning of the sales cycle.

This strategy can work well in markets where the product or service is truly new or innovative, since it is always easier to lower prices than to raise them. In any market, you will find customers that want to be the "first on the block" with the latest product or service, and are willing to pay a premium for it. These consumers are called "early adopters." Since early adopters are price insensitive, you can use them to your advantage by initially setting prices at a high level, and then lowering them over time to increase your market share. Consider a new restaurant in town that has a line outside its door. The proprietor of this new restaurant could certainly deploy a cream skimming strategy, and charge higher prices until the line shortens.