CLEP Principles of Marketing Exam Prep

Category - Business Operations

A company would be most likely to use a price-skimming strategy for a product in which prices are set high to maximize profits when:
  1. A product's sales have declined as it nears the end of its life cycle.
  2. The company is trying to capture market share for the product in a highly competitive market.
  3. A newly introduced product is popular and has little competition.
  4. The company wishes to recoup costs associated with a failed product that will soon be pulled from the market.
Explanation
Correct Response: C. Price-skimming involves setting a high initial product price in order to regain costs and then lowering the price over time as demand falls off. This strategy is most effective when the new product is popular and has little competition. A product nearing the end of its life cycle (A) will have trouble being sold at any price, especially at a higher price. Price-skimming seeks to attract a small segment of early adopters willing to pay higher prices and is not as effective at capturing market share (B). A company wishing to recoup costs associated with a product in the decline stage will not increase profits by increasing the price, since higher prices will result in decreased sales (D).
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