Last editedJul 20212 min read
There are many different types of pricing strategies that you’ll need to choose between when you launch a new business/product. Price skimming is a popular type of pricing for first-movers with little to no market competition, and while it may not be viable as a long-term strategy, it can enable you to maximize your profits when you launch a new product. But what is price skimming anyway? Find out everything you need to know, starting with our price skimming definition.
Price skimming definition
So, what is price skimming? Essentially, price skimming (also known as skim pricing) is a type of pricing strategy in which businesses initially charge a high price for their product/service, before gradually reducing the price to attract a more price-sensitive market segment.
Often used when a new product is launched, the goal of price skimming is to maximize your revenue to the greatest extent while interest from consumers is high and your business is facing limited competition. After you’ve met your revenue goals, businesses that have adopted a price skimming strategy will generally reduce their prices to attract cost-conscious customers, thereby maintaining a strong hold of the market.
Price skimming examples
Many well-known products can be considered examples of price skimming. Electronic products – take the Apple iPhone, for example – often utilize a price skimming strategy during the initial launch period. Then, after competitors launch rival products, i.e., the Samsung Galaxy, the price of the product drops so that the product retains a competitive advantage. A more recent example of price skimming is Sony’s PlayStation 5. Because it has few competitors, this next-gen console occupies a much higher price-point. However, as more competitors begin to launch rival consoles, the price will fall, as we saw with previous incarnations of the PlayStation product line.
What are the advantages and disadvantages of price skimming?
There are several advantages associated with adopting a price skimming strategy. Most importantly, price skimming can help produce a brand image built around quality. Owning your products becomes synonymous with prestige, ensuring that you’re able to charge higher prices for future products. It’s also worth remembering that price skimming can help your business to recover your costs/expenses more quickly, while you’ll also be able to generate a higher profit margin.
However, there are also a couple of negatives that you should think about before you start using price skimming for your business. Simply put, a price skimming model only works for a short amount of time, and if you reduce your prices too late, your customers may look to cheaper competitors, leading to a loss of revenue. It’s also important to note that price skimming may not be effective for follow-up products, especially if the product doesn’t exhibit considerable improvements over the original.
Ultimately, whether or not price skimming will work for you depends on the unique circumstances of your business. Generally speaking, price skimming is a good fit for businesses that can reach enough customers who are willing to pay at a higher price-point. For price skimming to work, it’s also important that lowering the price of the product doesn’t have a significant effect on unit costs. Finally, the business should operate in a space in which a higher price connotes quality, such as electronics, food and beverages, and so on.
For lower-cost items, such as household supplies, a different type of pricing strategy – i.e., penetration pricing – may be a better choice.
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