Price Skimming Strategy: Examples, Pros, Cons, and Tips

The purpose ofcharging more is because of many reasons; like covering the initial researchand development cost, and to check the demand whether customers would pay forit or not. Pricing your productis a very crucial part of the decision making of business after themanufacturing. Entrepreneurs and business owners have different types ofpricing strategies to choose from while keeping in mind the overall objectivesof the business. When a new generation of PlayStation is introduced, it enters the market at a premium price, attracting dedicated gamers and early adopters.

Examples of Price

• Without this brand equity, they would struggle to justify higher prices, even if the cars were of similar quality.
• While innovative new products may not be “essential,” customers are willing to pay above market price if they deem them “must-haves”.
• It’s like catching the first wave of enthusiasm, getting the most money before others join the party.
• This strategy best works if the company brings a breakthrough product to the market.

The beauty of price skimming is its ability to cater to different market segments sequentially. Initially, it targets premium customers, and as the price reduces, it captures the middle and lower segments of the market. This strategy was evident when Apple launched its iPhone SE models.

When is Price Skimming Appropriate?

Whenever, a brand likeSony, LG, Samsung, Huawei, Apple, Google, Nokia Oppo, Vivo, or any otherlaunches a new model of a mobile phone. Sometimes the company even stop manufacturing the previousmodel after launching the new models. When a business likeApple’s iPhone makes a profit with its price skimming strategy, then it wouldattract the attention of competitors like Samsun and Huawei.

When the new firm enters the market and thealready existing business would crash the market by lowering the price of itsproducts. Salesforce was one of the key proponents of the price-skimming philosophy in SaaS. The company provoked an entire paradigm shift in the SaaS industry to power its pricing strategy. Salesforce was the first company of its kind to make its CRM available at all times through the cloud. Later on, it was able to scale down to accommodate smaller businesses that also clamored to use the cutting-edge CRM. Even now that CRMs are more normalized in the market, few companies have employed skimming in the wake of Salesforce’s successful strategy.

• But the longer you keep prices high, the more likely you’ll alienate buyers.
• After it has set a high initial price, the company gradually brings down its prices to target customers having price sensitivity in their minds.
• Once the product has been on the market for some time and is no longer the latest must-have, companies must reduce the price to reflect its value to a wider demographic accurately.
• Increased competitive pressure combined with a need to capture a larger share of the market drives the need to reduce prices over time.

Affluent target customers

Apple experienced this type of backlash in 2007 when the company reduced the price of the iPhone by $200 just two months after its introduction. The quick 33% price drop from $599 to $399 may have helped increase demand, but some of the phone’s early adopters were understandably upset. As production costs decrease and market saturation increases, the price drops, attracting a new segment of buyers. However, not every brand can pull off a product launch and price skimming strategy successfully. Early adopters can be great for a brand, and that premium, exclusive feel of a price skimming strategy at launch can build hype among consumers. You want those early adopters lined up around the corner waiting to be the first to buy.

Disadvantages of Price Skimming

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. 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.

Plan ahead to maximize revenue with a successful product launch and pricing strategy. Overall, price skimming done right can be a smart way to increase profits, especially around a new release, and build up anticipation, hype, and loyal customers. Launched in 2007, the groundbreaking iPhone by Apple was a first-of-its-kind smartphone that has gone on to change the world. The multi-touch interface, soft keyboard, and integrated iTunes app had people clamoring to be the first to try this exciting new piece of technology, even with its launch price tag of $599. Pitched with much fanfare and a memorable marketing campaign, iPhone went on to sell 1.39 million units in its first year, and there are now over a billion iPhone users worldwide.

Customers are usually willing what is skimming pricing to pay more for new software or technological hardware that does something no other product can. A skimming pricing strategy is effective when the offering is unique and innovative enough to justify the price. Price skimming is less effective in crowded markets where many similar products compete.

With the Apple iPod, after launch competitors starting offering their own music players, like the Microsoft Zune. Sales won’t be strong for high-priced new products if that type of competition exists at launch. Many well-known products can be considered examples of price skimming.

Like all pricing strategies, price skimming is only effective when certain conditions are met. The tech and fashion industries are notorious for price skimming, though this pricing method can be applied in many other markets. Price skimming helps businesses change the price on their products according to the market situation, brand perception, customer response, product features, and competition.

Start your Price2Spy trial now, and see how it can ease the process of implementing your pricing strategy. The best example that comes to mind when we talk about price skimming is that of Apple. It’s like letting more people access a building by creating steps instead of a sudden jump.

Price skimming is a strategy in which a company initially sets a high price for a new product or service and gradually reduces it as the product gains wider adoption. This approach is often used to target customers who perceive high value in the new product and appreciate its novelty. Price skimming is most effective during the early stages of the Technology Adoption Lifecycle, particularly for customers who are considered innovators and early adopters.

If your product can generate strong word of mouth, these early adopters can not only bring in plenty of revenue for you but also become a key source of recurring revenue. This pricing strategy is used to maximize revenue through new products and services. This strategy best works if the company brings a breakthrough product to the market. The main goal of this strategy is to maximize profits in the shortest possible time rather than maximizing sales. This will help a firm offset it’s sunk cost before a competitor enters the market. Price skimming is used to maximize profits when a new product or service is deployed.

On the other hand, if you are a tech enthusiast, you probably bought something on the launch day or even preordered it, not caring about the price. You simply liked the idea of being among the first who put their hand on this cutting-edge technology. Trust us, that tech company calculated your steps and counted on them in their pricing strategy. Once the revenues are increased from customers who are willing to pay higher prices, the company will bring down the prices significantly and target price consumers who are price sensitive. This strategy is solely based on increasing revenue as much as possible. One benefit of early adopter customers is they act as guinea pigs for new products.

It doesn’t last long since the market will gain a few competitors and will be harder to hold onto the high markups on its goods. Also, it leads to loss of sales and user base if the business is unable to justify the higher price in the long run. After it has set a high initial price, the company gradually brings down its prices to target customers having price sensitivity in their minds. This pricing strategy is viable for companies that are first movers, who are new entrants and face negligible competition. Electronic productslike mobile phones are great examples of price strategy.

By that time, competitors usually enter the market so it’s the moment for a price drop. This way of dynamic pricing allows the company to keep its competitiveness. When the price is lowered, a second phase of the price skimming strategy starts.