Price skimming, also known as skim pricing, is a pricing strategy in which a firm charges a high initial price and then gradually lowers the price to attract more price-sensitive customers. The pricing strategy is usually used by a first mover who faces little to no competition. Price skimming is not a viable long-term pricing strategy, as competitors eventually launch rival products and put pricing pressure on the first company. The first phase is considered to be over when the demand is satisfied for the first, highest price.
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One of the most common examples of price skimming is the launch of Apple’s iPhone. When Apple introduces a new iPhone model, it tends to set a high initial price to target early adopters willing to pay a premium for the latest technology. However, as demand from this segment is met and newer iPhone models are released, Apple gradually lowers the price of the older models to attract more price-sensitive customers.
Which outcome is more likely for your business depends on the factors above, your pricing history, and your brand reputation. Brands leverage price skimming as a way to recover development costs quickly before the market becomes saturated and demand wanes. As you can see, there are distinct advantages and disadvantages to price skimming marketing. Whether or not this type of strategy makes sense for your business depends on your level of innovation, existing customer demographic, and market competition.
Requires specific market conditions
- Price skimming is one of the few pricing strategies that are quite easy to understand and implement; but even easier to get it all wrong.
- If you are going to bring a unique product, you need to invest in R&D, think out of the box and take a risk in launching the new product.
- Price skimming allows companies to recoup these retrospective costs faster than other pricing methods.
- Charging the highest initial price during the launch of an innovative product, particularly in high-tech industries, can help your company recoup research and development costs as well as promotional expenses.
- This way company can quickly return its investment in product development.
To do so, you need to know about price skimming—and whether it’s a pricing strategy you want to use for your next big thing. Consumer psychology dictates that higher-priced products will likely elicit higher perceptions of quality. Price skimming strategies signal consumers that products have a sense of exclusivity and are of better quality than competing brands. This can have a perpetual positive effect on the business and the brand. Developing innovative products usually requires a significant investment in research and development. Price skimming allows companies to recoup these retrospective costs faster than other pricing methods.
This follow-on price is appealing for more price-sensitive consumers, who start to buy the product. Theoretically, this would lead to a bigger quantity of sold products and generate additional revenue. Additionally, the lower price would put some additional pressure on the competitors who are trying to enter the market at this point, since they would be using penetration pricing.
- Often used when a new product is launched, the goal of price skimming is to maximize your revenue to the greatest extent while interest from consumers is high and your business is facing limited competition.
- When the new firm enters the market and thealready existing business would crash the market by lowering the price of itsproducts.
- If these market conditions are not met, a company could find itself funneling cash into an investment with very little return.
- The tech and fashion industries are notorious for price skimming, though this pricing method can be applied in many other markets.
How to Collect, Analyze, and Visualize Competitive Price Data
Use this strategy when you’re the trailblazer in the market, introducing something that’s never been seen before. It’s perfect for catching the attention of tech lovers or trendsetters. Companies quickly cover the costs of developing the product by charging a premium early on.
Therefore, the pricing strategy is largely effective with a breakthrough product, where the firm is the first to enter the marketplace. In such a strategy, the goal is to generate the maximum profit in the shortest time possible, rather than to generate maximum sales. This enables a firm to quickly recover its sunk costs before increased competition and pricing pressure arise. Often used when a new product is launched, the goal of price skimming is to maximize your revenue to the greatest extent while interest from consumers is high and your business is facing limited competition.
“Price skimming” originates from “skimming” layers, like removing successive layers of cream from the top of milk. Ultimately, whether or not price skimming will work for you depends on the unique circumstances of your business. Generally speaking, price skimming is a good fit for businesses that can reach enough customers who are willing to pay at a higher price-point.
Implement a smart price skimming strategy in your business today
Price skimming is not viable for services like legal, medical, or consulting. These services tend to be more demand inelastic, and bringing down the prices eventually doesn’t make any sense in these professional services at all. When it’s all said and done, price skimming should be considered another arrow in the quiver of the savvy pricing practitioner. Application varies depending on industry, product characteristics, and market dynamics, but when done well, it can lead to exceptional financial results.
Samsung faced backlash after reducing the Galaxy S10 prices soon after launch, which upset early buyers. Price skimming is not merely a strategy of setting high prices and then slowly reducing them. When applied aptly, it serves as a multidimensional tool offering multiple advantages that go beyond mere revenue accumulation. Price skimming is effective when there’s a lack of competition for that brand or product. Your early adopters can become rightfully upset if they feel like they’ve been ripped off, or if the product in question doesn’t deliver on the pre-release promises of functionality and quality. Price skimming is full of pros and cons, like with any pricing strategy.
Another condition for price skimming to be successful is that enough customers are willing to pay the high price for the product and that price does not attract competitors too fast. The strategy of price skimming helps to get the highest possible revenues from the innovations of these innovators. The prices cool down once the demand from these consumer segments fills up to target the customers who are more price sensitive. Over time, as demand from the initial customer segment is met and competition enters the market, the company gradually reduces the price to attract more price-sensitive consumers.
It’s because customers would expect more features at the sameprice, they would ask what is it for them to replace the product. For instance, the Galaxy series often starts with premium pricing and gradually adjusts prices over time to capture various segments of the market. Tesla’s approach to price skimming involves starting with high prices for their what is skimming pricing luxury electric vehicles, targeting wealthier consumers who seek innovation and exclusivity. Price skimming is a common strategy among tech giants like Apple, Sony Playstation, Samsung, etc. It is also utilized by apparel brands like Nike, Adidas, and others who want to leverage high consumer demand for new products they release.
What is Price Skimming? (Pricing Strategy, Definition, Examples)
If the firm maintainshigh prices of its products and services for a long time, the customers won’twant the company to lower its prices. The majority of the consumers wouldrevert to the cheap producers, and it would be a great loss of market share. To ensure the customers at the top of your demand curve don’t feel cheated, it’s important to use price skimming consistently and avoid hurried or blatantly obvious reductions in price. Price skimming can also be considered price discrimination, which is the strategy of selling the same product at different prices to different groups of consumers.
Meanwhile, its previous year’s lineup gets a price cut since they are no longer considered as bleeding-edge pieces of tech. As we were able to see, price skimming can be a beneficial strategy in theory. However, in reality, many factors should be taken into consideration before deciding in favor of this strategy. Your marketing strategy should be in line with your pricing strategy.
Brands across the globe have successfully adopted price-skimming strategies. As competitors begin to arrive, a form of price negotiation begins. After all, the price of a product plays an important role in whether people want to purchase it or not. 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.
IPhone users that like the device but are not passionate in their devotion are happy to wait until prices come down and the phone is more accessible. If, on the other hand, your follow-up is equally innovative, you might have further success with price skimming. In the short term, it will allow you to take advantage of an uncrowded market and get the maximum revenue.