Cheaper competitors can erode your company’s foothold on a market by offering similar products at lower prices. A successful price-skimming strategy requires an innovative product that arrives on the market well before those of your competitors. Price skimming helps businesses change the price on their products according to the market situation, brand perception, customer response, product features, and competition.
High demand allows for higher initial prices, while increased competition necessitates price adjustments. Price skimming is a more useful pricing strategy in industries with the potential for innovation and exclusivity. Price skimming requires successful product launches to justify the higher price and create buzz around the quality and novelty of products in the market. Companies use the price-skimming model to sell innovative or premium products to early adopters willing to pay a higher price for new or exclusive products.
If your product is high quality and new enough to stand out in the market, you can build excitement and interest around your product launch. 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. In simple terms, the business charges the highest price when the offering is launched and is new in the market, and then reduces the price over time. Among the different pricing strategies, price skimming is quite important and even complements well with other implemented pricing strategies. This blog is an excellent resource for gaining insight into different pricing strategies and how to create one for your product.
It can backfire when it’s expected.
Price skimming offers many benefits to your brand, but conversely, it can also harm your brand. Companies that engage in price skimming can come across as greedy, dishonest, or manipulative, reinforcing the notion that price skimming should not be utilized by all companies or for all products. For some products, customers await the opportunity to purchase when the price is right — especially when they can’t afford it initially.
Price skimming, or skim pricing, is a product pricing strategy characterized by selling a product at the highest initial price customers are willing to pay before slowly lowering prices over time. Businesses implement this type of pricing strategy to earn as much revenue as possible from customers prepared to pay high prices for innovative, new, or exclusive products. Company A is a phone manufacturing company that recently developed a new proprietary technology for its phones.
What is the Meaning of Price Skimming?
The goal is to gather as much revenue as possible while high consumer demand and competition haven’t entered the market. During the first month of that new car’s availability – demand is high, and you can justifiably keep the price high as well. However, as months 11 and 12 approach, car dealers and their buyers know the selling price will be substantially lower. One of the biggest perks of a well-implemented skimming strategy is the ability to change your price as the market what is skimming pricing shifts.
- Company A follows a price skimming strategy and sets a skim price at P1 to recover its research and development cost.
- The key to the strategy is to price the product right at launch and then time the price reduction appropriately.
- Meanwhile, its previous year’s lineup gets a price cut since they are no longer considered as bleeding-edge pieces of tech.
- Company A is a phone manufacturing company that recently developed a new proprietary technology for its phones.
- This technique is generally better suited for lower-cost items, such as basic household supplies, where price may be a driving factor in most customers’ production selections.
But despite the self-evident charms of price skimming as a dynamic pricing model, you’ll need a number of factors in place for it to be truly effective. Let’s take a look at some examples of price skimming that demonstrate what contexts are ideal for this pricing strategy. Key factors for effective price skimming include understanding the product’s life cycle, projected demand, and the competitive landscape.
Read more to learn about how price skimming works and how to implement price-skimming strategies effectively. Higher prices tend to draw news and press coverage, helping get more exposure and advertising for the product/service quite easily. The higher price also helps build a better brand image – if it suits the branding and is implemented properly – among consumers. Though price skimming can increase profit in the short term, it can also alienate customers who are unwilling to pay a higher price. A poorly managed price-skimming strategy could ultimately lose more revenue in the long run from customers who are upset by the high prices.
The price of the PS3 was then lowered every passing year and eventually reached $299 during the year was discontinued. For new products, like innovative home technology, a high initial price can signal quality and exclusivity. This attracts early adopters willing to spend more and can generate valuable word-of-mouth marketing.
It is safe to say that the skim pricing strategy does not work in many sectors and industries. B2B and contract-based are examples of sectors the use of price skimming strategy does not bring any benefit to both the business as well as the consumer. The technology, automobile, and clothing sectors are industries where the price skimming strategy works really well.
It’s a classic example of “you always want what you can’t have,” but with a skimming strategy, you may be able to have it a few months down the line. They serve as informal gatekeepers that either generate buzz for a product or snuff it out before it has a chance to find wider adoption. Part of the appeal of a new product may be the additional features, but much of the appeal is derived from the exclusivity of having a premium product.
Price skimming FAQ
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. Even then the price skimming implementation must be subtle or else there are high chances of the strategy backfiring. Price skimming may also be less effective for any competitor’s follow-up products. For example, once the initial market of early adopters has purchased the latest gaming console, other buyers may not purchase a competing product at a higher price without significant improvements over the original. Instead, these businesses might benefit the most from project-based or hourly pricing models.
Makes Sense: New Technologies
This approach contrasts with the penetration pricing model, which focuses on releasing a lower-priced product to grab as much market share as possible. This technique is generally better suited for lower-cost items, such as basic household supplies, where price may be a driving factor in most customers’ production selections. By selling products with a premium pricing strategy, you can increase the perceived value of your products and overall brand equity (your brand’s value). With price skimming, businesses lower prices after they meet the initial demand for a new product and as competitors enter the market with similar offerings.
Company A follows a price skimming strategy and sets a skim price at P1 to recover its research and development cost. After satisfying demand at P1, the company sets a follow-on price at P2 to capture price-sensitive customers and to put pricing pressure on competitors that enter the market. Price skimming is used to maximize profits when a new product or service is deployed.
Price Skimming: Definition, Strategy, & Examples
This could botch your rollout strategy and limit your revenue during the first wave of pricing. Therefore, it makes sense to use price skimming sparingly, if you anticipate buyers will react this way. This immediately boosts both revenue and profit, which the company can utilize to expand marketing and distribution, as well as cover R&D costs. As demand grew, manufacturing expenses decreased, and new competitors emerged on the scene, prices have reduced considerably, making the product more accessible to the general public. People are drawn to the brand due to the lure of being part of the in-crowd that owns Apple products. The name “skimming” comes from looking at all potential buyers like a stack — those at the top are willing to pay the most, while those at the bottom want to pay the least.