Skim pricing, also known as price skimming, is a pricing strategy that sets new product prices high and subsequently lowers them as competitors enter the market. Skim pricing is the opposite of penetration pricing, which prices newly launched products low to build a big customer base at the outset.
Businesses adopt a skim pricing model for several purposes, including:
Generating high short-term profit
Attracting early adopters
Segmenting customers as the price drops, according to what they are willing to pay for a new product
Big brands like Apple and Nike tend to do well with price skimming and provide excellent price skimming examples to examine:
Apple periodically introduces new iPhones with the latest features at a high price, attracts price-insensitive customers who value having the latest device to hit stores, and then sells them at lower prices to price-sensitive customers as newer versions are introduced.
Nike, an athletic apparel market leader, regularly introduces new designs at higher prices, relying on early adopters and loyal customers to purchase products at the introductory price. These prices can last for several months before Nike lowers the cost to sell remaining inventory to price-sensitive customers.
As you consider skim pricing for your business, consider this strategy’s advantages and disadvantages:
|Potential advantages||Potential disadvantages|
|Attracting early adopters whoe value having the latet products||Difficulty justifying initial high price|
|Generating revenue quickly||Difficulty entering a crowded market|
|Reaching the break-even point with fewer sales||Attracting competitors who offer similiar products at a lower price|
|Associating high-priced products with quality||Alienating early adopters who see others purchasing a product at a lower price than they paid|
|Offering retailers a higher initial profit margin||Being seen by consumers as pricing products unethically|
|Earning maximum profits from different customer segments as price drops||Creating a higher customer churn rate|
In addition to knowing the potential advantages and disadvantages of skim pricing, it’s helpful to evaluate your products and look for the four signs below before committing to a price skimming strategy.
Price skimming is generally not a viable strategy in a crowded market, as consumers will have their pick of comparable products at competitive prices. Examine your industry and the market segments you are targeting for opportunities to introduce new products at an initial high price.
Is your product among the first (if not the first) of its kind?
What do similar brands offer?
How might you market your products to price-insensitive early adopters?
As with the Apple and Nike examples we explored earlier, you may be able to succeed with a price skimming model if you are launching a product that consumers perceive as innovative and an indispensable must-have.
What are your product’s unique features?
What makes it one-of-a-kind and the result of careful research and development?
How can customers use it in ways that truly make a difference in their lives?
How can you ensure that the product’s quality surpasses what’s currently available?
What makes it difficult for competitors to emulate?
Conduct market research and review your current customer base to learn more about potential price-insensitive early adopters in your market segment. You may be able to leverage their must-have mentality.
Have segments of your current customer base become repeat buyers and thus loyal to your brand?
Do they perceive your brand as offering higher value than other brands?
Do these consumers behave like early adopters and take pride in being the first to get the latest products on the market?
Do they tend to expect higher prices?
When price changes do not affect the demand for a product, it’s called an inelastic demand curve. In other words, the need for your product would stay the same whether you lower or raise its price. Examples of such products include gasoline or toilet paper.
Here are some factors that may help you determine your product’s demand curve:
Consumers’ budgets: If buying your product would consume a large portion of a consumer’s budget, price changes would have a greater effect on demand. (Elastic)
Competition: If consumers have fewer products like yours to choose from and no viable substitutes, price changes would have less effect on demand. (Inelastic)
Necessity: If consumers view a product as necessary, such as a lifesaving medication, price changes will likely not affect demand. (Inelastic)
Skim pricing (or price skimming) can be highly effective for businesses that offer innovative products and have a system to attract price insensitive customers. It’s critical to research the market and consumer demand as you explore pricing strategies and choose the one that makes the most sense for your business goals.
Taking an online course can be a great way to learn more about pricing strategies. If you’re ready to maximize sales and profit, make effective pricing decisions, and gain a deeper understanding of customers’ responses to product pricing, consider taking the Pricing Strategy Optimization Specialization offered by the University of Virginia.
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Cost-Based Pricing, Pricing Strategies, Market-Based Pricing, Customer Value-based Pricing, Strategic Management, Channel and Direct-to-Consumer Pricing, Price Discrimination, Price Elasticity Of Demand, Customer Willingness to Pay, Measuring Customer Preferences, Customer Psychology, Competitor Pricing Models, Pricing to Competition, Market Segmentation, Competition (Economics), Conjoint Analysis, Executive Presentation, Pricing Economics
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