Price skimming aka skim pricing is a pricing strategy where businesses tend to markup the initial price of the product to a much higher rate and slowly decrease it as time goes on. Price skimming can only be effective with a unique product with limited competition, inelastic demand, and targeting customers with sufficient disposable income. If these market conditions are not met, a company could find itself funneling cash into an investment with very little return. Price skimming is a pragmatic pricing strategy that allows companies to generate the maximum profit from a new product while still appealing to the mass market over time. They do this with an innovative offering and clever branding and marketing to justify the higher price.
- Price skimming works by taking advantage of the initial high consumer interest when a product has just launched.
- They do this with an innovative offering and clever branding and marketing to justify the higher price.
- Experiment and optimize your pricing to secure the largest customer base.
Initially, the price is set high to catch the attention of tech enthusiasts and those eager to be the first to get their hands on the latest technology. As time goes by, the price drops, making the product more affordable for a wider group of people. The goal is to make the most money at the beginning, especially when there’s not much competition or when the product is one-of-a-kind. Later on, as more companies join the market or it becomes more crowded, the price comes down to stay competitive and appeal to more customers. The opposite of skim pricing is penetration pricing, which prices new items low to build a customer base. Skim pricing is a pricing strategy that targets early adopters willing to pay a high price tag for new technology.
Requires specific market conditions
If your product doesn’t offer customers anything new, why would they be willing to pay a high price to get it? Ensure your offering is truly novel and that your marketing clearly communicates its innovative features. Not every tech companyis big like Apple and Google; many companies are struggling to make their spacein the competition. Customers don’t pay high prices every company follows aprice skimming strategy, and demand doesn’t always increase when the price ofthe product changes. As a product is adopted by later stage lifecycle customers, the price strategy must mature accordingly. Increased competitive pressure combined with a need to capture a larger share of the market drives the need to reduce prices over time.
Dan Cakora is a Business Consultant at Vendavo, and has worked in various aspects of Pricing for over 15 years. Dan started his career as a Field Economist responsible for helping to measure inflation for the federal government. Before joining the Vendavo team, Dan was a customer at a large, international B2B distributor. He has led Pricing teams, developed Pricing and Sales Enablement products, and has a passion for data visualization. Dan has an MBA from DePaul University and a BS in Economics from Purdue University. Start your Price2Spy trial now, and see how it can ease the process of implementing your pricing strategy.
Building a Strong Sales Enablement Strategy
Key factors for effective price skimming include understanding the product’s life cycle, projected demand, and the competitive landscape. High demand allows for higher initial prices, while increased competition necessitates price adjustments. The main reason companies use price skimming is to recover their fixed costs more quickly. In the SaaS world, the amount of money spent on developing, testing, and refining a platform can far outweigh the costs of hosting and maintaining the service. With a carefully designed price skimming strategy, the company can reduce the time it takes to recover their initial sunk costs. They will set initial prices high to appeal to affluent consumers seeking status symbols.
In a niche market with a limited customer base, customers may be price-sensitive and may not be willing to pay a premium price for a new product or service. The higher initial price right from the launch helps recover the amount invested in the research and development of the product/service quite quickly and easily. This also helps in recuperating advertising and marketing costs quickly.
PRODUCT FEATURES
If you check at least one of those boxes, then a price skimming strategy is worth considering. Additionally, price skimming is beneficial when there’s a lack of competition at product launch. Customers can’t get less-expensive alternatives, and those who are particularly interested in your product will pay a higher price. If you’re going to eventually reduce the price anyway, why not launch at that lower price tag? However, there are specific regulations regarding price discrimination in certain industries, such as pharmaceuticals. To justify the high cost to early adopters, it is important to create a sense of exclusivity and value around your product.
Set a low initial price to gain market share and attract a large customer base quickly. Penetration pricing can be effective for those products with high price elasticity, meaning demand is sensitive to price fluctuations. Price skimming is a pricing strategy that involves launching at a high price and reducing the price over time. This high initial price allows businesses to maximize profit upfront and then continue to capture sales as pricing decreases. As demand for your product stabilizes and competition increases, it is important to monitor your sales and adjust your pricing strategy accordingly. If sales are slow, consider lowering the price to attract more customers.
This pricing strategy is what is skimming pricing named for “skimming” the top layers of cream from milk. This is meant to signify the company getting more of the consumer surplus as it works the price down the demand curve. When price skimming, businesses risk losing trust and increasing customer churn.
- Price skimming is commonly used by businesses in industries where products have high initial development costs and significant consumer interest.
- As prices drop, the narrative can shift to accessibility, widespread availability, and value for money.
- In many cases, especially in fast-moving industries, there may also not be much competition at the time of launch.
- The price of the PS3 was then lowered every passing year and eventually reached $299 during the year was discontinued.
- Even then the price skimming implementation must be subtle or else there are high chances of the strategy backfiring.
- This approach works well when different customers value your product differently.
What is the difference between price skimming vs penetration pricing?
On the other hand, price penetration is the strategy where marketers lower the price of its products and service, with the plan of grabbing a great market share. It usually happens in the category of common low-priced items; like ordinary household products. It’s because such items are everybody’s needs, and everyone expects a lower price.
Price skimming can give businesses a competitive advantage by positioning the product as high-quality and exclusive. This perception can attract early adopters willing to pay a premium price for the product. About 73 percent of online stores said price changes are the main factor of competitive pressure. Tesla’s approach to price skimming involves starting with high prices for their luxury electric vehicles, targeting wealthier consumers who seek innovation and exclusivity.
A Deep Dive on Price Skimming
Ever wondered why the price of a new Apple iPhone starts so high when introduced? Or why Tesla electric vehicles are positioned as a premium product? In both cases, Apple and Tesla are engaging in the strategy of price skimming. When is it used, and what are a few pros and cons of the strategy?
Apple Inc.
It’s usually better to think of the “profit” in terms of market validation and a dedicated group of core customers that can evangelize the product. For example, Nike is known for setting a high prices for its new products and then lowering them at the end of the season. This pricing strategy is mostly used by companies that develop new products, so at the launch moment, there is almost no competition and therefore no pricing pressure.