1. Price Skimming
• A marketer sets a relatively high initial price for a product or service at first –then lowers the price over time
• A temporal version of price discrimination or yield management
• Allows the firm to recover its sunk costs quickly before competition lowers the market price
• Objective is to capture the consumer surplus early in the product life cycle – to exploit a monopolistic position or the low price sensitivity of innovators
• A product pricing strategy – a firm charges the highest initial price that customers will pay
• As the demand of the first customers is satisfied – then the firm lowers the price to attract another, more price-sensitive segment
• Hence the name from skimming successive layers of cream – or customer segments – as prices are lowered over time
• Limitations:
o It is effective only when the firm is facing an inelastic demand curve
o A price skimmer must be careful with the law – Price discrimination is illegal in many jurisdictions – but yield management is not
o The inventory turn rate can be very low for skimmed products
o Skimming encourages the entry of competitors
o Skimming results in a slow rate of stuff diffusion and adaptation
o The manufacturer could develop negative publicity – they lower the price too fast without significant product changes
o High margins may make the firm inefficient.
• Examples:
o Technological markets: The top segment of the market which are willing to pay the highest price first – when the product enters maturity the price is then slowly lowered
o New product: Just entered the market – business usually start with a high price and it will lower over time
o Luxury car
o The book market: a new book is published in hardback at a high price
2. Product Bundling
• A marketing approach – multiple products or components are packaged together into one bundled solution
• Has become increasingly common in the early 21st century – companies try to overcome the costs of acquisition
• When effective – bundling offers benefits to business and its customers
• As with other business strategies – business may succeed or fail with product bundling
• Typically – long-term benefits and better customer relationships development
• Business should carefully analyse revenue + profit projections for both unbundled and bundled
• If bundled solutions generate lower profits and no customer advantages – no sense
• Tracking bundling performance and customer satisfaction helps ensure long-term benefits
• Examples
1. Electronics retailers often bundle hardware, software and accessories – such as, buy a computer + get a bundle deal with the printer, monitors, cables and antivirus software
2. Banks bundle – banking products to maximize the amount of business from each customer
3. Restaurants – commonly bundle food items to create value meals or combinations