Everything You Need To Know About Price Skimming

When launching a new company or product, one thing I always advise business owners is to decide on a wide range of pricing tactics. While price skimming may not be a feasible long-term strategy, it can help you increase your earnings when introducing a new product. 
Price skimming is a popular pricing approach for first-movers with little to no market rivalry. Of course, the more people your product will likely appeal to, the better. 
So how can you create a pricing strategy for your product that doesn’t limit its appeal? How do you target the wealthy, upper-market groups without alienating others with lower willingness to pay levels?
Skim pricing is one method for achieving that. It’s a hard strategy that not all businesses should adopt. 
However, if you understand how price skimming operates and use it well, it may give you an unmatched competitive edge. It can also assist in growing your client base and market share, as well as significantly enhance revenue and the regard in which your product and business are viewed.
But what exactly is price skimming? Learn everything you need to know, starting with our definition of price skimming.

What Is Price Skimming?

What exactly is price skimming, then?
Skim pricing is a product pricing method where a business sets the highest initial price for a product and gradually reduces it. Price skimming refers to the practice of a business “skimming” consumer groups by gradually lowering the price. 
Skim pricing is another name for price skimming. Most businesses that adopt this price strategy create new items, so there isn’t much rivalry at launch time and no pricing pressure.
Businesses may resort to price skimming if they encounter any one or more of the following circumstances:

• The business has a strong brand and is consumer base
• The service or product is new or ground-breaking in the market
• There is no competition
• The vast number of potential buyers for the good

How Does Skim Pricing Work?

Usually, when a new product is launched into the market, price skimming is used. The manufacturer of that goods chooses the highest price point that consumers are willing to pay. 
This enables the business to generate as much revenue as possible when there is little competition and sufficient demand. By doing this, the business may swiftly recoup its expenditure on product development. 
The business relies on innovators and early adopters during this initial stage of price skimming. For instance, in the tech sector, these individuals are constantly looking for the newest advancements and cutting-edge equipment to purchase. 
Those would be the trendsetters in the fashion world who are constantly looking to purchase brand-new designs for the upcoming season. These are the ones who are price agnostic and willing to take some risk. The product is then positioned as a “must-have” and “the best in its category” in price-skimming marketing. 
The first phase is complete when the demand is satisfied at the highest price. It’s the right time for a price reduction because competitors usually enter the market by then. The company can maintain its competitiveness thanks to this system of dynamic pricing. 
A second stage of the price skimming approach begins when the price is reduced. More price-conscious buyers start purchasing the goods due to the follow-on price’s attractiveness.
Theoretically, this would result in more things being sold and more money being made. Since the competitors would be employing penetration pricing, the lower price would also put further pressure on them as they try to enter the market now.

When Is Price Skimming Appropriate?

I frequently get the question, “Which items are excellent for price-skimming?” There is no one correct response, but it is troubling that some product types respond to price skimming more favorably than others. 
The finest products for price skimming are those that are linked to advances and are released frequently. Companies in the tech and fashion sectors, for instance, have excellent results when pricing their products in this manner.
Typically, a price skimming method is appropriate when the demand curve is inelastic. This indicates that the price has little impact on the quantity of demand, and lowering it would only slightly increase sales volume. 
Another prerequisite for price skimming to be effective is that there must be sufficient demand for the goods to justify the high price tag and that the price must draw in only a few rivals at a time.
Price skimming is also acceptable when the high price is seen as higher quality. This is why it can be used with the “prestige pricing” psychological pricing technique. 
However, it would be wise to be cautious. Customers may switch to a less expensive product if they choose a pricing point that is too high or if the price decrease occurs too late. This will reduce the volume of your sales. 
Additionally, you risk upsetting your devoted clients if the price of the new product is significantly less than the initial price. If there is a significant price gap between two items, innovators and early adopters will feel duped, and if your business has done this previously, clients will start to put off purchases for a few months.

The Principles Of Price Skimming 

If you employ a price-skimming method, you’ll have to carefully monitor the course of your product after it is released. 
The period right after your product’s debut is probably when enthusiasm for it will peak. You can quickly recoup the development cost and generate a steady first profit by focusing your early efforts on appealing to upper-market niches.
In the first few months after launch, your product is also least likely to face direct competition. Additionally, you will have solidified your reputation with that initial wave of pleased clients by the time any competition for your product does materialize. You can then reduce your prices to enter the lower market levels.
This can be a potent counter-tactic for any rival trying to neutralize your advantage through penetration pricing.

Price Skimming Examples 

Price skimming is a frequently employed tactic in the tech sector, as I previously stated. This price strategy is used by almost all tech juggernauts for at least some of their products if not all of them.
Apple and Samsung are two excellent examples from the IT sector; they have used price skimming to boost sales and draw customers with great success. Giants in other industries also employ similar pricing techniques. 
Nike, for instance, has a reputation for pricing its new products high and then decreasing them at the end of the season. Here are several instances of pricing skimming:

1. Game Console 

Sony’s selection of game consoles employs the price-skimming tactic. For instance, the business priced the PlayStation 3 console at £425 per unit, anticipating strong sales in light of the PlayStation 2’s popularity. The business also offered exclusive goods. 
Sony had set a modest price for the PS2, but they anticipated that the PS3 would have many prospective buyers and raised the price at launch. Every year, the cost of the PS3 was reduced until it was discontinued at £249.

✋ Stop worrying about SEO and have me do it for you

PS: Ready to work with the 0.01% of all SEOs worldwide? Click here.

2. Fashion Items 

Fashion items are yet another excellent illustration of price skimming. Brands like Gucci, Louis Vuitton, and others frequently launch new products at exorbitant costs before gradually lowering them over time.

3. Online Stores 

Online stores like Amazon also employ price-skimming techniques. To draw clients, they frequently provide discounts and coupons before gradually raising prices as the need for the good or service grows.

4. Mobile Phone Manufacturer 

AFG Technologies makes mobile devices. The business created a cutting-edge phone that gained some attention. The 4GB variant costs £599, and the 8GB model costs £899 at launch. All of the phones were rapidly sold out. 
Two months after the product’s first release, the business reduced the cost of the 8GB variant to £499. With its latest phones, AFG Technologies routinely employs a skim pricing strategy. It can significantly increase interest in its cutting-edge items to entice early adopters. A few months later, they lowered their prices to draw more customers.

5. Innovative Service 

Proprietary technology was recently created by Company T, a manufacturer of phones. To recoup its costs for R&D, the corporation implements a skim pricing strategy and sets its skim price at P1. After meeting demand at P1, Company T establishes a follow-on rate at P2 to put pressure on new competitors and draw in price-conscious clients.
With its Q1 sales, Company T generates money = A + B according to its price skimming method. With its follow-on price, it produces additional revenue = C from sales of Q2 minus Q1 sales. With the sales from Q2, the company has a total income of A + B + C.

Advantages and Disadvantages Of Skim Pricing 

Price skimming has the benefit of allowing businesses to recoup sunk expenses, such as the high cost of R&D. Additionally, the producer maximizes profits from diverse target markets by periodically skimming the price till it reaches the supply-demand point. 
When competitors take their time to catch up after extensive and complicated research and development, the seller has more chances to maximize market profits. Generally speaking, using a skimming method has the following advantages:

• get back sunk costs
• the market is segmented
• uses minimal sales to reach break-even
• The margin for retailers can be larger.

Additionally, price skimming has certain clear drawbacks. The biggest of these is that it is only a viable strategy for a small number of businesses that invest so heavily in R&D that it is challenging for rivals to make goods or services that are exact replicas of their products. If not, rivals might create less expensive (and occasionally better) goods and services akin to what they provide. 
The drawbacks can be listed as follows:

• Only when the product follows the inelastic demand curve is it appropriate.
• increase competition and make nature’s inelastic properties elastic
• Customers occasionally decide to wait until the price drops

A market-skimming technique is typically not practicable in an established and crowded market. One would have to provide goods that significantly outperform the competition in such a setting.

Limits Of Skim Pricing 

When applied for a short time, the skim pricing approach works best, allowing the early user market to fill up without losing price-conscious customers permanently. If a reduction in price occurs too late, customers might switch to cheaper competitors, losing sales and revenue.
Skim pricing could not be as effective for any follow-up products from other businesses. Since the initial market of first adopters has been achieved, future customers might only buy a rival product at an increased cost, materially enhancing it over the original.

Wrapping Up 

As you observed, price skimming is a tactic that has much potential. In practice, though, there are many things to consider before using this tactic. 
Your pricing strategy and marketing plan should complement one another. Additionally, the quality and innovation of your product must be sufficient to support the high price. The most important thing is to keep a watch on your rivals to prevent things like setting a price that is too high or dropping it too late.
There you have it, then. This article has examined price skimming’s definition, methods, and illustrations. This article has given you further insight into price skimming’s operation and potential applications as a pricing technique. Thanks for reading.
Did you find this helpful? If you’d like to read more about useful business tips, here are more articles to check out: 

• Top Tips For Optimizing Your Amazon Storefront
• Your Guide To Starting An Online Store This 2022
• App Store Optimization Starter: A Beginner’s Guide

Comment below what other business-related content you’d like to see.