What Is Price Skimming? Definition & Examples
Pricing methods are some of the most useful tools a business has at its disposal. A pricing strategy that you may know of is price skimming. Over time, price skimming has earned a mixed reputation. However, it may be more useful to your business than you think if done correctly. Keep reading to learn about how price skimming may benefit your business.
Here’s What We’ll Cover:
What is Price Skimming?
Price skimming is a pricing strategy that involves using a higher price than you’d expect. It requires introducing a product at a high initial price, then reducing the price over time. This premium price should be at the highest point that the market will allow for. This means setting your product’s price high; much higher than you’d anticipate in some cases. It’s also called price discrimination. Why start with a high price, though? We’re glad you asked.
When you’re considering price skimming, you have to look at the market conditions. They need to be right for your strategy to work correctly. When you introduce your product at the highest price possible, you’ll attract a market segment. These customers are going to be the ones that are loyal to your brand. They’ll be early adopters. Initial sales volume and market share may seem low. That’s expected when employing this pricing strategy.
After a predetermined amount of time, you’ll decrease the cost of your product. This is the key to an effective pricing strategy centred around skimming. As the price drops, you’ll attract more customer segments. Your customer base will grow, and your sales volume will increase. The initial loss of sales due to a higher price can be justified by this increase in volume. Loyal customers will initiate the sales of your product, while potential customers will fill in the gaps when the price drops.
Price Skimming is the Opposite of Penetration Pricing
When you compare penetration to price skimming, you’ll find that the two strategies are exact opposites of one another. Penetration pricing strategies focus on market penetration. This means that items are introduced at a cost that’s significantly lower than what it will be. These introductory prices help attract a large amount of customers. The price is normally only offered for a limited time. Then, after that time has passed, the price increases.
The penetration pricing model can lead to flat sales after the introductory price is no longer available. Rather than start at a premium price, the price is as low as possible without losing money. Then, when prices increase, customers will tend to lose interest.
Examples of Price Skimming
In today’s competitive market, there are some larger companies that employ price skimming strategies often. You may not realize that they’re doing it, though. Once we’ve pointed it out to you, you’ll likely notice a trend in their pricing. As far as modern pricing strategies go, price skimming is used frequently among these industries.
While many technology companies use the price skimming model, Apple has proven that they are the best at it. They frequently introduce new products, and lower the price within a year. Many of their customers are loyal enough to purchase products at their full price. However, a much larger segment will wait for the initial price to drop. Regardless of how long it takes to drop, Apple knows that they’ll be getting their business.
A large number of fashion companies use the price skimming model to their advantage. Fashion is a seasonal industry, which makes the model work exceptionally well. For example, products will be released at their full price during the appropriate season. Then, as new lines are introduced for the next season, prices drop. Many clothing companies also operate discount retailers in outlet locations. This is a way to use the pricing strategy to its fullest potential.
The Benefits of Price Skimming
Price skimming is a strategy that comes with a host of benefits. These are easy to see, and can help many companies if used correctly.
Quick Return on Investment
One of the biggest benefits of the price skimming model is the quick return on investment it provides. Companies that have high development costs or production costs can benefit from price skimming. Since products are set at their highest price, they lead to greater profit margins to begin with.
Products that are hard to come by end up having a more pronounced reputation than readily available ones. Additionally, products set at a higher price tend to be seen as being higher quality. Price skimming, when paired with production strategies, can achieve both of these effects. Products that are on the cutting edge will attract customers that strive to be innovative, as well. Reputation can help with that.
Products that are introduced using the price skimming model are more flexible in price than their competitors. Because these products are set at their highest price initially, the price can be lowered when need be. As such, companies can move the price around to generate sales as time goes on. It can happen more quickly, should sales be too low to start.
The Limitations of Price Skimming
Even though price skimming seems great, it does have some limitations attached to it, too. These limitations are described below.
- Low initial sales can come as a result of prices that are set too high.
- Customers can become frustrated when they see prices lower. This can create mistrust, as well, which may damage your brand.
- Price skimming requires a strong reputation to start. Without it, customers will be price-sensitive. This means that you’ll lack the initial sales to make the model effective.
Price skimming is one of the common pricing strategies used by businesses. It relies on being able to set an initial price high, then lowering it to attract more sales. If a company has an established brand or reputation, they can use price skimming with each product release. However, if price skimming isn’t planned well, it can lead to a drop in sales and stagnation in cash flows. If you found this article useful, be sure to check out our resource hub. We have plenty of articles just like it!