When it comes to pricing strategies, there are a lot of options out there. But if you want to maximize your profits, price skimming is the way to go. What is price skimming?
Price skimming is a strategy where you charge high prices for a product or service at first, and then gradually lower the price over time. This allows you to capture the most value from early adopters and then still be competitive as more people enter the market.
I personally used price skimming when I launched my latest software product. I charged $997 for the initial release, and then after six months, I lowered the price to $497. This allowed me to get maximum revenue from my early customers while still being able to compete with other products on the market that were released later on. Learn more about what is price skimming and how you can use it to benefit your business.
What Is Price Skimming?
This technique called “price-skimming” involves charging a high price for a product, then gradually lowering the cost.
The high price should be at the upper limit of what the market is willing to pay. This means that you should set the price of your product or service higher than you anticipated.
Why start with a high price point?
When looking at your price strategy, you need to look at the current state of the market. The right market condition is key for your strategy to work correctly.
When you charge the highest price possible for your product or service, you will bring in customers who are willing to pay a premium for what you’re offering. These customers are known as “early adopters” and they will be loyal to your brand.
Initial sales volume will be slow and market share will be small at first.
That is to be expected when employing price skimming.
After a certain amount of time, you will lower your price. This is how you effectively use a price skimming model. By doing this, you will draw in more customers from more market segments and increase your client base. As your clientele grows, so will your revenue.
The higher price point may result in some initial losses in sales, but this can be made up for by the increased volume of sales that will come from loyal customers and new potential customers.
Price Skimming Is the Opposite of Penetration Pricing
When you compare the two, you’ll realize that they are complete polar opposites. Penetration pricing models are all about penetrating the market.
Offering introductory prices is a good way to get a lot of people to purchase your product or service. This is because it’s offered at a lower price than what it will be later on.
The price is only available for a short time and then it goes up.
The penetration pricing model sets the price as low as it can go while still making a profit.
When prices are raised, consumers tend to lose interest in purchasing.
Examples of Price Skimming
In a competitive marketplace, some businesses use pricing strategies that are designed to skim profits off the top. You might not even realize it.
Once you notice a trend in their pricing, you’ll realize that most of these companies are using price skimming as a technique.
Apple has mastered the technique of price skimming. They regularly introduce new products at a premium price and then lower the prices a year later.
Many of their loyal customers will purchase their products at their full retail price. A much larger segment of customers will wait for the product to go on sale.
Regardless of how long it takes for the prices to drop, Apple knows that they’ll be getting their business.
The fashion industry often uses the price-skimming strategy. The seasonality of the fashion world makes that approach work. When products are released at regular retail prices, they typically sell well. Then, when new lines are introduced in the following season, the prices go down.
Many companies use outlets as a way to offer their products at discounted prices.
The Benefits of Price Skimming
Although price-skimming comes with its share of risks, it also comes with several advantages. These are easy to spot and could help many businesses if utilized properly.
One of the primary advantages of this model is the quick return on investment that it offers. This is especially helpful for those with higher development and production costs. By pricing your products at a slightly higher rate, you can generate a greater profit margin from the get-go.
The reputation of a product tends to be more noticeable if the product is harder to come by. Also, more expensive products tend to have a higher perceived quality.
When price skimming is used in conjunction with production strategies, it can create a situation where the product is seen as both. This will attract customers who want to be seen as innovative and cutting edge. Having a good reputation can go a long way towards helping achieve this goal.
Because products introduced using this model are flexible in their pricing, they can be priced lower than competitors if need be.
As such, companies are able to change the prices of their products at will. This can happen more quickly, should a product be moving too slowly.
The Limitations of Price Skimming
Although price-skimming seems like a great idea, it does have its drawbacks.
- Initial sales volume is low when prices are set too high
- Customers may become distrustful if they see lower prices. This can damage your brand name.
- Starting a price-skimming business without a good reputation can be an uphill battle. Without initial sales and positive word of mouth, it will be hard to convince customers to pay more.
When to Use Skimming Or Penetration
Companies often choose the strategy that best helps them achieve whatever goals they have in mind, whether that’s to maximize their market share, profit margin, total profit, or customer lifetime value.
Their decision might be affected by factors like production capacity.
The target demographic and price elasticity can also influence their pricing strategy.
When to Use Price Skimming
Here are situations where the skim pricing model may be appropriate:
You have an innovative product: Your product doesn’t have any competitors or a reference price point. You’re creating the market and entering the market.
You want to target early adopters: You sell to the most discerning of customers who are willing to pay a premium for the newest and most innovative products on the market.
The demand for your product is unknown: If you don’t know the demand for your product or service, you could set it high to determine how much it will cost to produce, including the marketing expenses, which might require a large amount of money.
Low price elasticity: Since the product’s price is inelastic in its early days, your revenue can be high even though your sales are low. Once the market sees your product, sales will rise and the price will drop.
You want to launch a product that’s part of a portfolio: When you want to launch a new product in a portfolio, you can combine it with other products that are in the same collection and use different price strategies. You can begin with a high-end product and then later offer a less expensive version with fewer options. Or, you can start with one offering and then a more expensive option. Either way, you target a select market but provide an alternative for more budget-conscious customers.
When to Use Penetration Pricing
Here are situations where penetration pricing may be appropriate:
Your product has strong competition: Your product is already on the market and established companies are selling something similar. Lowering the price of your new offering could attract customers who are used to buying from these companies and convince them to try yours.
Introductory campaign: One strategy you can use when launching a new product is to offer it at a reduced price. You can then raise it once it has gained some momentum. Another option is to offer free samples or free trials for a limited time. Your goal is to acquire as many customers as possible and then keep them once prices return to normal.
Create entry barriers: If you want to prevent new competitors from entering the market, setting a low price makes it difficult for them to match yours or divert customer attraction away from your products.
High price elasticity: When a client has a choice between your brand and a different product, the demand is more flexible. In this case, penetration pricing is a good option.
Existing market share: You have already established yourself in the market, and are already selling a lot of products.
What is price skimming? This is a great pricing strategy if you want to maximize your profits. It allows you to capture the most value from early adopters and then still be competitive as more people enter the market. If you’re thinking about using price skimming for your next product or service, make sure to do your research first so that you can set the right price point.