While price skimming involves charging different prices at different times, it’s generally considered legal as long as the price differences are not based on discriminatory factors like race, gender, or age. However, there are specific regulations regarding price discrimination in certain industries, such as pharmaceuticals. When you use price skimming, you start with a high initial price for a new product and then decrease its price over time. Wondering if a price skimming strategy is the right choice for your business? We’re answering all of your questions about price skimming here—including its advantages, pitfalls, and use cases.
Principles Behind Price Skimming
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. Price skimming is commonly used by businesses in industries where products have high initial development costs and significant consumer interest. This includes technology companies like Apple and Samsung, which use this strategy for new smartphone and gadget launches, as well as high-end fashion brands and automobile makers. 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. “Price skimming” originates from “skimming” layers, like removing successive layers of cream from the top of milk.
Each new version of the iPhone might only have a few new features, but loyal Apple early adopters still believe owning the new device is worth the higher investment. 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. Price Skimming can be effective when done correctly, but pricers should beware of common pitfalls. Price skimming is a complex yet rewarding strategy when applied effectively. By understanding its nuances, finance professionals can make informed decisions, whether it’s investing, banking, or steering a corporation’s financial course.
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Depending on your product and your long-term goals, you may use a mix of pricing strategies. For instance, price penetration and price skimming often make good partners. Curious to know how much your business could earn with a price skimming strategy?
While innovative new products may not be “essential,” customers are willing to pay above market price if they deem them “must-haves”. Price skimming will not work in markets with highly price-sensitive customers and similar products. In these situations, they will likely sniff out the best deal, regardless of brand. Unlike premium pricing, a price skimming strategy doesn’t require prices to be permanently high, so businesses are not limited to servicing only the top layer of customers. This pricing strategy allows them to maximize profits by charging a higher price while a sense of excitement and exclusivity surround the launch before leveling out prices over time to “skim” other market segments.
- Whenever, a brand likeSony, LG, Samsung, Huawei, Apple, Google, Nokia Oppo, Vivo, or any otherlaunches a new model of a mobile phone.
- After its initial launch, the surrounding hype, and the entry of new competitors, it can be difficult for businesses to maintain above-market prices for each new version of the product.
- Misjudging the market can lead to excess inventory if the high price deters too many customers.
- The strategy of price skimming helps to get the highest possible revenues from the innovations of these innovators.
Price skimming example
Therefore, a businessshould avoid price skimming strategy as soon as meeting its targets andcovering its initial research and development cost. Subscription pricing, which involves charging customers a recurring fee for access to your product or service, is another alternative to price skimming. This model can generate a predictable revenue stream and cultivate customer loyalty. If a business doesn’t have an existing strong brand with high customer engagement , price skimming can lead to low initial sales because there aren’t enough people willing to stomach the high initial price.
Doesn’t Make Sense: B2B SaaS
This strategy works in contrast to penetration pricing (this strategy grabs a market share through lower prices set initially). Price skimming is a strategy where a company introduces a new or innovative product at a high price to maximize revenue from customers willing to pay a premium. Once the demand from these early adopters is met, the company gradually reduces the price to attract more price-sensitive buyers.
Incorporate skimming into your pricing strategy only when you have enough repeat buyers to generate dependable word of mouth and assurance that you can’t be easily undercut. As established above, price skimming is most effective when your company can rely on the context around product launches being in your favor. While some of the most illustrious examples of successful price skimming are hardware as opposed to SaaS, the technology adoption life cycle still makes it a more than viable pricing strategy for SaaS companies. This is particularly true for those SaaS companies whose primary market targets are in the high-end, and who tend to cut enterprise-grade deals.Having the latest technology holds powerful social currency. 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. Early adopters are typically enthusiastic consumers who value being the first to own new products.
When you are doing all this, you would of course keep the price of the product high to get the benefits in return. Companies like Xiaomi adopt a low initial price strategy to quickly gain significant market share, contrasting with the skimming approach. When consumers see a product priced significantly higher than its counterparts, the immediate assumption is that it offers superior quality or features. 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.
Misleading consumers about the reasons for price changes or the actual value of the what is skimming pricing product can lead to legal action for deceptive practices. For instance, falsely advertising a “limited-time offer” to pressure consumers into buying a product at a higher price is a deceptive practice if it creates a false sense of urgency. Utilizing price skimming to intentionally drive out smaller competitors can be interpreted as illegal predatory pricing under antitrust laws. In times of crisis or emergency, excessively high prices could be considered price gouging, which is illegal in many jurisdictions.
Laggards often must be enticed to buy a product by offering discounts or promotions. Now, as a final observation, how effective do you consider the price skimming strategy for a brand in generating more leads, conversions, sales, and loyal customers? It allows the initial purchasers’ market to get saturated, on the other hand, not alienating buyers who are price sensitive over a long period. Price skimming helps businesses change the price on their products according to the market situation, brand perception, customer response, product features, and competition. Price skimming helps businesses have better control over the pricing of their products. These early-adopters and enthusiasts help a business to gain more insight into the functioning and performance of their products.