ACCA Performance Management (F5) Certification Practice Exam

What is the main principle of a market-skimming pricing strategy?

1. Charging a low price for rapid market acceptance

2. Setting a high price initially to maximize short-term profitability

3. Offering discounts based on purchase volume

4. Utilizing variable costs for pricing

The correct answer is: Setting a high price initially to maximize short-term profitability

A market-skimming pricing strategy involves setting a high initial price for a new product to capitalize on consumers who are willing to pay a premium for the latest innovation or luxury. This strategy aims to maximize short-term profitability by targeting segments of the market that are less sensitive to price and more focused on quality or exclusivity. By initially setting a higher price, companies can recoup their research and development costs more quickly and achieve high profit margins during the early stages of the product's lifecycle. As the market becomes saturated or as competitors enter the market with similar products, the price may gradually be reduced to attract more price-sensitive consumers. This approach not only helps to establish a strong brand image associated with quality or innovation but also secures revenue from early adopters before the price falls to accommodate a broader audience. This differentiates it from competition-focused pricing strategies, which might prioritize brand penetration and market share over immediate profitability.