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How Price Skimming Boosts Modern Pricing Strategies | The Motley Fool

Investors should be familiar with price skimming. It may at first sound like a shady financial fraud, but price skimming is actually a legit business tactic.

So, I’m not talking about credit card skimmers, which try to steal your card number and login information via dastardly technological tricks. And we aren’t looking at basic “skimming,” where morally challenged people grab a few dollars or cents out of a passing cash flow, hoping that the crime will be invisible. Nope, not at all.

Often used by electronics builders such as Apple (NASDAQ: AAPL  ) and Sony (NYSE: SNE  ) , price skimming is a simple but effective pricing strategy that boosts the overall profits for a new product. It’s the polar opposite to “penetration pricing,” which is designed to grow market share instead of maximal profits.

The idea is to market the same device to a different set of customers in several stages. You start out with high prices, hoping for early adopters and die-hard brand enthusiasts to pay top dollar for the bleeding-edge new thing. When that market segment has been satiated, walking away from the table in search for the next hot item, prices drop to a level that’s comfortable for mainstream consumers. And if that larger market gets its fill, it’ll be time to drop prices even further, attracting the bargain-bin crowd.

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How Price Skimming Boosts Modern Pricing Strategies (AAPL, SNE).