Price Skimming is a pricing strategy that you can use in your business to capitalize on your product’s innovation, novelty, timeliness, or exclusivity. However, you will need to use and adjust this strategy in an effective manner. Only then will you be able to maximize your business’ revenue when it comes to individual product lines. This is a strategy you can use during the launch of a product or service in your business.
In this article, you will learn about what price skimming is in business and how it works during product launches. Next up, we will also share with you a simple example of price skimming and when this makes sense in business. Finally, we will discuss the major pros and cons of price skimming in business, which can help you to make better decisions on pricing. Hence, to learn more, read on through to the end of the article.
What Is Price Skimming?
According to Investopedia,
“Price skimming is a product pricing strategy by which a firm charges the highest initial price that customers will pay and then lowers it over time. As the demand of the first customers is satisfied and competition enters the market, the firm lowers the price to attract another, more price-sensitive segment of the population.”
In price skimming, you are basically launching a product at a higher-than-usual price and lowering the price incrementally with time. With the passing of time, the product becomes less novel and becomes more common. Hence, the price of the product declines as a result.
However, a business can only do price skimming in a new and innovative product. This is because the customers and the market already know the value of existing products. Suddenly increasing the price of a product will not help.
Price skimming falls under the demand-based pricing method. The “skimming” word comes from the process of skimming successive layers of cream. The business performs a “skimming” based on the potential buyers of the product. The potential buyers are stacked on the basis of who wants to pay the most (at the top) and the ones who want to pay the least (at the bottom).
How Does Price Skimming Work?
In business, while strategizing for pricing, you are skimming the top customers who are willing to pay high and have already made their purchases. Once you skim, you then adjust the price of the product on the basis of what the next group of buyers are willing to pay.
According to the Wall Street Mojo,
“The strategy focussing on consumers who are early adopters or with high discretionary income is well utilized by different industries, mainly technology and fashion, where less-price sensitive customers are prevalent. Such customers are influenced by brand value, technological advancements, high quality, enthusiasm for the latest editions, etc.”
Businesses use the price skimming method when they come up with a new and innovative technology. They first keep the price on the higher side. Customers who want to stay updated with new technology will pay a high price.
However, once a certain number of products are sold to the first-tier customers, the business slashes the price to sell the products to the next stage of customers, who want to pay a bit less. Thereby, the business goes on decreasing the price of the product with time, based on what the next-level customers are willing to pay.
How Do Businesses Practice It? – An Example
An article on Hubspot gives an example –
“Price skimming is typically employed for new technologies. DVD players are a good example of this. When DVD players first hit the market in the late 90s, they could cost you up to $1,000. Now, if you do a quick search on Amazon, you’ll see that a new DVD player will set you back around a mere $35.”
The same is true with 3D Printers as well. In the 1980s, when 3D Printers came into commercial markets, the price tag was really hefty. In some cases, the price was as high as $300,000. However, if you look today, as the demand for 3D printers grew and the world saw a decrease in manufacturing expenses, along with the emergence of big competition, prices got lowered.
Major Pros And Cons Of Price Skimming
The following are some of the major pros and cons of price skimming that you must know for pricing strategy:
Pros Of Price Skimming
Here are the major pros of price skimming from which you can expect to benefit from:
- It helps businesses to maximize revenue at the early stages.
- The higher price at the start, along with a rollout strategy, helps in creating a buzz.
- When the price of the product drops, the newfound affordability helps in creating a new demand.
- The business can change the price of the product with shifts in the market.
- Price skimming helps in creating the name of the brand.
Cons Of Of Price Skimming
Here are some of the cons of price skimming which you must be aware of:
- The early buyers who buy the product at a higher price get frustrated and angry when they find out the price dropped. This leads to the loss of high-paying customers.
- Customers will anticipate your price-skimming strategy with the next product and will wait for the product’s price to decrease.
- Your rival will get the chance to create similar products and sell them at lower prices.
- Although it helps your brand to grow at first, in the long run, it damages the brand name.
Hope this article was helpful for you in getting a better idea of what price skimming is and what its application is in business. This is basically a pricing strategy that businesses use to charge the highest initial price for a product from their customers. The business lowers the price of the product with time as the product becomes more accessible.
This is a strategy to attract more price-sensitive customers by lowering the price as the product’s competition enters the market. What is your opinion on this pricing strategy that businesses use? Share your thoughts and opinions with us in the comments section below.