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When is skimming an appropriate pricing strategy? Why is a financial feasibility study important?

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When is skimming an appropriate pricing strategy?

Why is a financial feasibility study important? What information should be included?

Many companies use percentage mark-up as their pricing strategy. What are the advantages of basing all pricing on a set mark-up? What are the disadvantages?

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Skimming

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.

The success of a price-skimming strategy is largely dependent on the inelasticity of demand for the product either by the market as a whole, or by certain market segments.

High prices can be enjoyed in the short term where demand is relatively inelastic. In the short term the supplier benefits from 'monopoly profits', but as profitability increases, competing suppliers are likely to be attracted to the market (depending on the barriers to entry in the market) and the price will fall as competition increases.

The main objective of employing a price-skimming strategy is, therefore, to benefit from high short-term profits (due to the newness of the product) and from effective market segmentation.

There are several advantages of price skimming

? Where a highly innovative product is launched, research and development costs are likely to be high, as are the ...

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