When it comes to pricing strategy, one of the best, market favorites is price skimming – charging high prices for a product or service that is unique to the market or particularly innovative, then bringing the price down as competitors enter the field.

There are several advantages to setting this kind of pricing strategy, and it can work for a variety of products, such as clothing retailers, gourmet foods, electronics and technology, and conspicuous goods. The skimming pricing strategy has five distinct advantages, not including the fact that profit margins are much wider with a skimming pricing strategy.

Build an elite image.

By charging very high prices, a product can be marketed as high-quality and build their image through their pricing. It is much easier to start a product out at a high price and lower it over time, rather than start low and build up to higher prices. Products that follow the latter pricing strategy often see a decline in sales once prices are raised. Wider overall profits are seen with skimming, especially with a new product that is being established as superior quality.

Gain from the “prestige” market.

Those who are image conscious, and believe they are getting the very best product on the market (and who will settle for nothing less), will be willing to pay more for the label. Skimming is very successful within this market – those who enjoy shopping at Sharper Image and similar stores are quite accustomed to paying much higher prices for their goods and services. They prefer the latest gadgets, the finest clothing (as perceived by others), and often perceive that price equates with quality (and in many cases, such as Bose and Armani, it does). These consumers are willing to pay for such prestige items.

Make dealers happy.

Simply put, if the price is set very high for the supplier, the dealer is able to sell at higher mark-ups. This is the type of shared market value that dealers love to see. They will stock up, mark-up, and sell up – especially if they are dealers for the prestige market.

Segment the market.

Skimming works well when dividing the market and reducing the prices of products and services at certain stages. Working carefully, segmenting the market and introducing lower prices in phases makes for a greater profit from each segment.

Recoup R & D costs.

Some of the more innovation-oriented products come with a hefty research and development price – especially if that product is new to the market entirely. Skimming will enable the developers to recoup the money spent on set-up, marketing, research, development, and other overhead costs.

Essentially, the pricing strategy of skimming is the ideal for the majority of products on the market, but particularly new and innovative ones. It appeals to prestige consumers at first, then mass market, and finally, the price conscious market. With this pricing strategy in place, maximum profit is seen at very little risk with consumers.