Discover skim pricing, how it works, and how to decide if it’s the right pricing strategy for your business.
Skim pricing, also known as price skimming, is a pricing strategy that sets new product prices high and 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 examples:
Apple periodically introduces new iPhones with the latest features at a high price, attracting quality-centric customers who value having the latest device in stores. As they introduce newer versions, Apple sells them at lower prices to price-sensitive customers.
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 the 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 |
---|---|
Attracts early adopters who value having the latest products | Can be difficult to justify initial high price |
Generates revenue quickly | May make it difficult to enter a crowded market |
Helps your business reach the break-even point with fewer sales | Can attract competitors who offer similar products at a lower price |
Faciliates the association of high-priced products with quality | Alienates early adopters who see others purchasing a product at a lower price than they paid |
Offers a higher initial profit margin | Consumers seeing your pricing as unethical |
Lets you earn maximum profits from different customer segments as price drops | Increases the likelihood of a higher customer churn rate |
In addition to knowing the potential advantages and disadvantages of skim pricing, it is 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. This entails finding answers to questions such as:
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?
Like Apple and Nike, you may succeed with a price skimming model if you launch a product that consumers perceive as innovative and indispensable. To determine if a price skimming model is right for your product, consider reflecting on the following questions:
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 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 high-spending early adopters in your market segment. You may be able to leverage their “must-have” mentality. Ideally, your market research should answer the following:
Have segments of your current customer base become repeat buyers, 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 petrol and clean drinking water.
Below 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 quality-centric, high-paying customers. Researching the market and consumer demand as you explore pricing strategies and choose the one that fits your business goals is critical.
An online course can be a great way to learn about pricing strategies. If you’re ready to maximise sales and profit, make effective pricing decisions, and gain a deeper understanding of customers’ responses to product pricing, consider taking the Pricing Strategy Optimisation Specialisation offered by the University of Virginia. Available on Coursera, this Specialisation offers insights into market and competitor pricing models, cost and economics in pricing strategy, and more.
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