It is used when a product, which is new in the market or just launched, is sold at a relatively high price because of its uniqueness, benefits to customers, or its current Wow factor. However, slowly but surely when the product gets older in the market, then the price is dropped and the product is brought at competitive pricing. Why would you consider adding a price skimming strategy to your pricing program? Price skimming is thestrategy where marketers charge higher price of its product and service in thebeginning, and then reduce it over time. Today we will discussprice skimming strategy and how it’s important.

In some cases, this strategy is against the law, but the actual conditions that define illegal price discrimination are shady, to say the least. For more on the ethical issues of price discrimination, check out our post on pricing strategy ethics. This strategy allows Apple to maximize early revenue from a new product and gradually expand its market reach without alienating different customer segments. By lowering prices over time, Apple can remain competitive and continues to generate sales throughout the product’s life cycle.

A price skimming strategy tries to get the highest possible profit from innovators and early adopters. As the demand from these two consumer segments fills up, the price of the product is reduced, to target more price-sensitive customers such as early majorities and late majorities. 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. While the skim pricing strategy helps in increasing the profit margins of the company, this is only for a short while.

In the end, we will give you some great examples of successful companies using a price-skimming strategy to increase their return on investment (ROI) and sell their products at the best price for them. The strategy of price skimming is very helpful for many different kinds of industries, but it doesn’t make it right under all circumstances. Many factors need to be taken into consideration if the company wants to follow this strategy of price skimming. Only after considering all the circumstances should a company follow this strategy to increase its revenues.

Therefore, when suchcompanies launch a new product and they charge a high price for it, then it’sjustifiable that they have invested a lot. If your business has spent a lot ofresources, producing something innovative and creative, and it would bejustifiable to charge higher, in the end, to cover up the initial cost. After a few months, Samsung typically reduces prices to attract price-sensitive consumers and maintain competitiveness in the market.

Hence, many innovative companies will use the price skimming method. As indicated by their name, “Innovators” are the first group to adopt a product or technology. They are part of a niche group and probably have a connection to the new product or service that is being introduced. They provide a critical service of validating fit and spreading awareness of the product or service. This is usually a very small group, so it is difficult to extract large profits from customers at this stage.

• One benefit of early adopter customers is they act as guinea pigs for new products.
• There are manyprice-conscious consumers in the market; the company lowers the price of itsproduct or service to make it readily affordable to them.
• The majority of the consumers wouldrevert to the cheap producers, and it would be a great loss of market share.
• It’s like letting more people access a building by creating steps instead of a sudden jump.
• Sometimes, a fantastic strategy isn’t enough to get you across the line.

What is the difference between price skimming vs penetration pricing?

For instance, the iPhone 11 was introduced at a premium price, appealing to tech enthusiasts, and over time, the price decreased, making it more affordable for a wider market segment. Initially, a company might have the spotlight, but if it keeps prices high for too long, it’s like stepping out of line. Others might take their place, reducing the company’s market share.

• 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.
• 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.
• This phase is followed by price skimming marketing, labeling the product as a “must-have” and “the best in its category”.
• It’s because customers would expect more features at the sameprice, they would ask what is it for them to replace the product.
• Even now that CRMs are more normalized in the market, few companies have employed skimming in the wake of Salesforce’s successful strategy.

Tiered Drop Technique

The company responsible for that product chooses the highest price point customers are willing to pay for that product. This allows the company to gather as much revenue as possible while competition has not entered the market and the demand is high enough. This way company can quickly return its investment in product development. This helps brands in channelizing their initial endeavors toward upper-market sections that do not care about the higher prices.

Higher Competition

Those status-conscious consumers that purchase your innovative product first can provide valuable feedback and help you work out the kinks before the next update and foreseeably a wider user base. In addition to being valuable testers, early adopters who love your product can act as brand evangelists that create a perception of quality via word of mouth. This free promotion will persuade new customers to buy the product when the price drops.

What is price skimming?

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. As with many pricing strategies, skimming done wrong can decrease sales, hurt profits, and limit your ability to launch new products in the future.

Some status-orientedcustomers prefer and willing to pay a higher price for the product and service.The company generates profit to finance its upcoming projects. When the firmreaches its target, then it lowers the prices and makes the product availablefor the mass audience. The sale increases and the company achieves the maximummarket share. 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.

Recover sunk costs faster

It’s less successful for follow-up competitor products because the early adopter market may already be saturated. 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. Proper implementation requires a lot of analysis and market research. Even then the price skimming implementation must be subtle or else there are high chances of the strategy backfiring.

As the console’s life cycle progresses and production costs decrease, Sony lowers the price, appealing to a broader audience. As time passes, Apple gradually reduces the price, making the product accessible to a broader audience. This approach works well when different customers value your product differently. It allows tailoring prices for various groups, maximizing profits from each segment. As seen in the streaming wars, the entry of Disney+ and Apple TV forced other platforms to reconsider pricing.

For starters, price skimming is effective when there’s a lack of competition for what is skimming pricing that brand or product. Sticking with Apple, the first iPod was a huge breakthrough for portable music players and was priced around $400. That price was soon decreased by about $100, then another $50, over the next one to two years. Apple was able to price skim because there wasn’t a portable music player on the market that could compete with the first generation iPod at launch.

Their products are not just timepieces or bags; they are symbols of prestige, craftsmanship, and class. For instance, when the first OLED TVs came on the market, they were incredibly pricey. Yet, early adopters who desired an unparalleled viewing experience were ready to pay the premium. By submitting this form, I agree that the Terms of Service and Privacy Notice will govern the use of services I receive and personal data I provide respectively. Sometimes, a fantastic strategy isn’t enough to get you across the line.

Price skimming is not a viable strategy in an already busy market. Unless your product includes amazing new features no one can match, it might be a good idea to avoid skimming if you want to maintain a competitive advantage. This approach works well for products with a high perceived value or innovative features, where early adopters are less sensitive to price. Initially targeting these consumers, companies can recover their investment quickly and generate significant early profits. Once the market becomes more saturated with competitors, lowering the price helps capture a broader audience and maintain market share.

So how can you reach the right customer at the right time with the right offer? Flintfox’s Omnichannel Pricing tool gives you a full view of your channels so you can pivot your strategy and update prices with the click of a button. Our intelligent pricing platform lets you wave goodbye to spreadsheets (and grey hairs) and say hello to fully automated pricing that gets it right every time.