If you’ve ever bought a new product only to find it later offered at a reduced price, you might have encountered price skimming. With this pricing strategy, retailers can earn extra revenue by initially pricing items higher.
Although price skimming can benefit specific businesses, it also comes with some disadvantages merchants need to be aware of before pursuing it. Read more to learn about how price skimming works and how to implement price-skimming strategies effectively.
What is price skimming?
Price skimming, or skim pricing, is a product pricing strategy characterized by selling a product at the highest initial price customers are willing to pay before slowly lowering prices over time. Businesses implement this type of pricing strategy to earn as much revenue as possible from customers prepared to pay high prices for innovative, new, or exclusive products.
With price skimming, businesses lower prices after they meet the initial demand for a new product and as competitors enter the market with similar offerings. This practice is not the same as discounting items to move out older stock and make room for new products.
Price skimming also stands in contrast to other pricing strategies like penetration pricing, which involves selling new products at a lower price point than competitors to earn a greater market share.
How does price skimming work?
Companies use the price-skimming model to sell innovative or premium products to early adopters willing to pay a higher price for new or exclusive products. Over time, especially as more competitors enter the market, companies use this strategy to lower prices to sell the same products to more price-sensitive customers.
There are several examples of price skimming in the tech and fashion industries. Technology company Apple uses price skimming when it releases new versions of its iPhone at premium prices—some customers pay more to gain early access to the exclusive features offered by new product launches.
Advantages of price skimming
- Increased revenue
- Enhanced brand image
- Ability to target different customer segments
- Attractive to early adopters
There are several price-skimming advantages to consider, including:
Companies can widen their profit margins early upon launching a new product and selling at higher prices. Price skimming can help businesses recoup their research and development costs by selling innovative products at the highest price the market will accept.
Enhanced brand image
Some companies use price skimming to enhance their brand image. By selling products with a premium pricing strategy, you can increase the perceived value of your products and overall brand equity (your brand’s value).
Price skimming can create an impression of exclusivity and excellence. If your product is high quality and new enough to stand out in the market, you can build excitement and interest around your product launch.
Ability to target different customer segments
Price skimming focuses on various customer segments at different times. In the price-skimming model, consumers who are willing to pay extra get early access to new products, while more price-sensitive customers engage with the same products later. With a thoughtful strategy for when and how much to lower prices, price skimming can align with marketing efforts to target a variety of customer segments.
Attractive to early adopters
Early adopters are customers who embrace a new product before the majority of the market. Another one of the advantages of price skimming is it can attract early adopters who want the latest and greatest, despite the cost. Early adopters can generate dependable word-of-mouth marketing, building buzz around a new product.
Disadvantages of price skimming
There are also several disadvantages of price skimming that can ultimately outweigh the advantages based on your specific product line, company, and industry.
Though price skimming can increase profit in the short term, it can also alienate customers who are unwilling to pay a higher price. A poorly managed price-skimming strategy could ultimately lose more revenue in the long run from customers who are upset by the high prices.
Companies should exercise caution about ethical pricing practices and avoid any price discrimination, or when you simultaneously sell products to consumers at different price points.
Price skimming can attract attention from competitors who recognize that you’re selling your products at a high price. Cheaper competitors can erode your company’s foothold on a market by offering similar products at lower prices. A successful price-skimming strategy requires an innovative product that arrives on the market well before those of your competitors.
Hurts customer loyalty
You also run the risk of losing loyal customers who were early adopters to your new product and became frustrated by seeing the product price decrease after their purchases. Repeat buyers may notice this trend and wait until the price drops on new products, delaying sales and undermining your price-skimming strategy.
Has limited effectiveness
Price skimming only makes sense for companies that know the price changes won’t affect their overall sales volume. Price skimming is an ineffective pricing strategy if your company sells in a crowded market or if your products fit within an existing pricing framework, given your competition.
Only a limited number of companies can benefit from price-skimming strategies, making them difficult to implement without a revolutionary product that sets them apart from their competitors.
When should you use price skimming?
Price skimming is a viable pricing strategy for companies with an unparalleled competitive advantage based on their brand equity, product quality, or exclusivity. Price skimming requires high consumer demand for your products and an inelastic demand curve, meaning demand for your products remains, even if the prices change.
When determining whether price skimming is right for your business, evaluate what your competitors are creating, how your customers perceive the equity of your brand, and if your product is breaking new ground in the market. Price skimming requires successful product launches to justify the higher price and create buzz around the quality and novelty of products in the market.
Price skimming FAQ
What is the difference between price skimming and price penetrating?
Price skimming is the practice of selling a new product at the highest price point possible for the market, whereas price penetrating is the opposite strategy designed to earn a wider reach of the market by selling new products at a lower price.
Is price skimming legal?
Price skimming is legal, although the practice can hurt companies’ reputations, as some customers may see it as unethical, especially depending on how you implement the strategy and how it affects the market.
What are common examples of price skimming?
Common examples of price skimming include businesses in the technology and fashion industries, like Apple charging high price points for the newest iPhone or Nike setting higher prices for new styles of its Air Force 1 shoes.
Is price skimming better for certain industries?
Price skimming is a more useful pricing strategy in industries with the potential for innovation and exclusivity. For example, a technology company developing new kinds of software has a better chance of successfully implementing a price-skimming strategy than a company trying to break into the crowded beauty and wellness market with products similar to the competition.