Price-Skimming Strategy
TermiKnowledge - Supply Chain, Procurement and Inventory Terminologies
The strategy of Price-Skimming, sometimes known as Price-oggles, is a warehouse-based strategy adopted by many global corporations to reduce cost of production by eliminating excess inventory. Some companies adopt this strategy even before establishing a physical presence in the customer's local area ( Warehouse Inventory Planning (WIP), for example) or after establishing a firm relationship with the customer (FET or forward agreement). Companies that do not have a presence in the customer's local area or have no established relationship with the customer on a long-term basis use price skimming to gain competitive advantage by selling over-priced products in the hope that the customers will eventually find another retailer with better prices. This practice, though seemingly benign on its face, can result in substantial customer discounts and even induce the manufacturer or distributor to enter into supply chain agreements with competitors.
High-end manufacturers such as Costco use price-skimming strategies on an everyday basis. Costco has no inventory sitting on its shelves; instead it purchases products in bulk and sells them at low prices to retailers and vendors. Its strategy of buying low and selling high is not unique. Many large retailers and vendors follow similar practices; however, because Costco's policies are more flexible and its business model more open, it attracts more high-end consumers who have cash in their hands and are willing to pay more for today's premium goods. In addition, because Costco is a regional supermarket chain, its customers typically enjoy better service than customers in competitor stores.
To adapt from a price-skimming strategy to an inventory-driven one, an enterprise must first establish its credibility as a low-cost leader that sells good value to high-end customers. For a midsize or small enterprise, this process can be more challenging, particularly if the company lacks a nationwide presence. One approach used by some high-end companies to build credibility with smaller enterprises is offering free apple samples to entice them into buying larger quantities. Another method companies use to build consumer trust is offering free gifts, like a free iPad or a free camera to potential customers. Whether the motive is customer satisfaction or building consumer trust, maintaining a consistent revenue stream and an efficient sales force are critical to achieving success in today's competitive retail environment.
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