Price skimming is a popular pricing strategy used primarily by large companies with high degrees of product innovation. These companies often have a good market understanding, know their target customer, and can leverage the perception of their product's quality among potential buyers. This approach is also beneficial because it brings in a large revenue quickly, resulting in short term profitability, and usually serves as an effective method for recouping the development costs associated with the product.

The theory behind price skimming is that customers respond to the perceived value of a product or service. Initially, a company will maximize revenue by targeting the customers who are looking for the best or most innovative product regardless of price. When they have satisfied the needs of this segment, they can then lower the price to penetrate a new market, where customers are less price-sensitive and may be more willing to pay a higher price for additional services or features.

The price skimming strategy typically involves multiple prices that are offered to different product segments. For example, a company may offer its product with a high price to a certain segment of early adopters and then offer it at a lower price to later adopters. This allows the company to capture more of the market share by offering different price points to different customer segments. It also offers the company more control over the price of their product and helps avoid the low-price wars that can occur in price-sensitive markets.

The effectiveness of price skimming will depend on the product and industry. Companies should assess the pricing of their competitors, identify their target segments, and consider the overall competitive environment before deciding if price skimming is an effective strategy. Price skimming works best when the company is able to create a good customer experience, offer customer service and generate customer loyalty while driving a higher price. If a company is unable to do so, they may have difficulty competing in the market.