Which of the following best describes skimming?

What Is Price Skimming?

Price skimming is a product pricing strategy by which a firm charges the highest initial price that customers will pay and then lowers it over time. As the demand of the first customers is satisfied and competition enters the market, the firm lowers the price to attract another, more price-sensitive segment of the population. The skimming strategy gets its name from "skimming" successive layers of cream, or customer segments, as prices are lowered over time.

Key Takeaways

• Price skimming is a product pricing strategy by which a firm charges the highest initial price that customers will pay and then lowers it over time.
• As the demand of the first customers is satisfied and competition enters the market, the firm lowers the price to attract another, more price-sensitive segment of the population.
• This approach contrasts with the penetration pricing model, which focuses on releasing a lower-priced product to grab as much market share as possible.

How Price Skimming Works

How Price Skimming Works

Price skimming is often used when a new type of product enters the market. The goal is to gather as much revenue as possible while consumer demand is high and competition has not entered the market.

Once those goals are met, the original product creator can lower prices to attract more cost-conscious buyers while remaining competitive toward any lower-cost copycat items entering the market. This stage generally occurs when sales volume begins to decrease at the highest price the seller is able to charge, forcing them to lower the price to meet market demand.

Skimming can encourage the entry of competitors since other firms will notice the artificially high margins available in the product, they will quickly enter.

This approach contrasts with the penetration pricing model, which focuses on releasing a lower-priced product to grab as much market share as possible. Generally, this technique is better-suited for lower-cost items, such as basic household supplies, where price may be a driving factor in most customers' production selections.

Firms often use skimming to recover the cost of development. Skimming is a useful strategy in the following contexts:

• There are enough prospective customers willing to buy the product at a high price.
• The high price does not attract competitors.
• Lowering the price would have only a minor effect on increasing sales volume and reducing unit costs.
• The high price is interpreted as a sign of high quality.

When a new product enters the market, such as a new form of home technology, the price can affect buyer perception. Often, items priced towards the higher end suggest quality and exclusivity. This may help attract early adopters who are willing to spend more for a product and can also provide useful word-of-mouth marketing campaigns.

Price Skimming Limits

Generally, the price skimming model is best used for a short period of time, allowing the early adopter market to become saturated, but not alienating price-conscious buyers over the long term. Additionally, buyers may turn to cheaper competitors if a price reduction comes about too late, leading to lost sales and most likely lost revenue.

Price skimming may also not be as effective for any competitor follow-up products. Since the initial market of early adopters has been tapped, other buyers may not purchase a competing product at a higher price without significant product improvements over the original.

What Is Skimming?

Skimming is a method used by identity thieves to capture payment and personal information from a credit card holder. Several approaches can be used by fraudsters to procure card information, with the most advanced approach involving a small device called a skimmer that reads the information stored in a card's magnetic strip or microchip.

Key Takeaways

• Skimming is an illegal practice used by identity thieves to capture credit card information from a cardholder surreptitiously.
• Fraudsters often use a device called a skimmer that can be installed at gas pumps or ATM machines to collect card data.
• Some machines act like point-of-sale technology. An acquired card is swiped, and a touchpad allows the user to enter a security code.
• Card users are warned to keep their cards in their sight at all times and to cover the pin pad when inputting security codes at ATMs.

How Skimming Works

Skimming can occur anytime a cardholder uses an electronic payment card at a brick-and-mortar location. Fraudsters can obtain information in various ways, and the technology that they use is becoming more sophisticated and challenging to detect.

Skimming allows identity thieves to capture information from a cardholder that can be used to make fraudulent transactions. Some fraudsters may simply photocopy or take digital photos of information that can be used fraudulently. Other more advanced technologies also exist, such as skimming devices designed for use in many different situations.

At brick-and-mortar locations, a fraudster can use a small skimming device that allows them to swipe a card and obtain information from its magnetic strip. Some skimmers may also include a touchpad that allows the thief to enter a security code.

Skimming technology is becoming more sophisticated each year, and it is difficult for authorities to stay one step ahead. Some skimmers are as thin as a credit card and can be inserted into ATM machines and gas pumps.

Thieves can also build skimming devices that can be used at automated teller machines (ATMs) and other point-of-sale locations such as gas stations. Skimming devices can be installed on an ATM with cameras and overlay touchpads can be added to capture individual personal identification numbers. Gas stations are another target where skimming devices can be easily installed since card readers are often outside at the gas pump and separate from a checkout.

Mitigating Compromised Card Information

Cardholders should be cautious of any suspicious devices involved with an electronic payment. In some situations, skimmers can be easily detected if a thief uses more than one device to complete an electronic transaction.

To avoid having their card skimmed, cardholders should maintain possession of their card or keep it in sight at all times. Dining at restaurants with a collective checkout can also help to ensure a card is not compromised when taken from the cardholder.

In 2021, two men were sentenced to 75 months in federal prison for an ATM skimming fraud that resulted in $587,529.50 in losses to financial institutions located in Michigan, Nebraska, and Iowa.

Many businesses will integrate electronic fraud security systems into their payment process, which can protect them from all types of fraudulent approaches and cyber attacks. Payment card companies are also broadening their solutions for security and fraud prevention.

Cardholders can check with their individual issuers through customer representatives or online resources to gain greater insight into any services or solutions that may be available to increase card security and mitigate compromised card information.

What best describes skimming?

What is the primary difference between cash larceny and skimming?