the term price skimming is derived from the phrase“skimming the cream off the top.” Companies often use this strategy for new products when the product is perceived by the target market as having unique advantages .For example,Caterpillar sets premium prices on its construction equipment to support and capture its high perceived value. Genzyme Corporation introduced Ceredase as the first effective treatment for Gaucher’s disease. The pill allows patients to avoid years of painful physical deterioration and lead normal lives. A year’s supply for one patient can exceed $300000
As a product progresses through its life cycle, the firm may lower its price to successfully reach larger market segment. Economists have described this type of pricing as “sliding down the demand curve.” Not all companies slide down the cure. Genentech’s TPA, a drug that clears blood closts, was still priced at $2,200 a dose four years after its introduction, despite competition from a much lower priced competitor.
Price skimming works best when the market is willing to buy the product even though it carries an above-average price. If, for example, some purchasing agents feel that Caterpillar equipment is far superior to competitors’ products, Caterpillar can charge premium prices successfully. Firm can also effectively use price skimming when a product is well protected legally, when it represents a technological breakthrough, or when it has in some other way blocked entry to competitors. Managers may follow a skimming strategy when production cannot be expanded rapidly because of technological difficulties, shortages, or constraints imposed by the skill and time required to produce a product. As long as demand is greater than supply, skimming is an attainable strategy.