In what scenario is a skimming pricing strategy typically used?

A skimming pricing strategy is employed when there are different price-market segments. This strategy involves setting a high initial price for a new or innovative product to maximize revenues from those customers who are willing to pay a premium for it. The segments that are targeted first typically consist of early adopters or those experiencing significant value from the new offering, before gradually lowering the price to attract additional customers in less lucrative segments.

In such scenarios, the intended differentiation among customer segments allows businesses to capitalize on the varying willingness to pay. As the product gains acceptance and the market broadens, the price can be reduced to appeal to more price-sensitive consumers. This strategy is particularly effective in industries with significant innovation or when launching products that have unique features or brand prestige.

In contrast, scenarios where the demand is highly elastic typically would not support skimming, as a lower price would be necessary to induce purchases. When production costs are well known, a more competitive pricing strategy might be more appropriate rather than skimming. Lastly, if competitors have similar products, the ability to maintain a high price point is often diminished, making skimming less viable. Therefore, the correct choice emphasizes the value of market segmentation in successfully implementing a skimming pricing approach.