After companies have produced a new good or service, it becomes necessary to put a price at which consumers can purchase such a product or service. When pricing, it is important that the price is not too high so that it does not discourage people from patronizing the brand. It is also important that the price is not too low such that the business incurs losses instead of making a profit. In a bid to get a balance and choose the most effective price, companies often use different types of pricing strategies based on various existing factors such as competition, target market, and sales goals.
The skimming pricing strategy is one of these pricing strategies that could be employed by a company when pricing its products or services. This strategy is often favored by technology companies due to its many benefits. In this article, we shall have a closer look at the skimming pricing strategy and practical examples of how it is implemented. We shall also discuss some advantages and disadvantages of adopting this pricing strategy.
What is skimming pricing strategy?
The price skimming strategy is a dynamic pricing strategy that involves charging the highest possible price that the market can tolerate for a new product or service. This is often done so that the initial investment in the production of the good or service can be easily recuperated within the shortest possible time. The goal of the skimming pricing strategy is to increase sales while demand is high and competition is low.
Skimming pricing strategy is also known as price skimming, skim pricing, or skim-the-cream pricing strategy. This strategy attracts early adopters of new products who are willing to pay a high price for them. It additionally leverages the absence of similar products in the market to enjoy the maximum benefits of interest in the product or service to charge the highest possible price which can drive up revenue immediately.
However, this high price is not maintained all through the life cycle of the product or service. Usually, as the product losses its novelty over time and sales begin to dip, the price also gets gradually reduced to attract other classes of customers. This includes those who will purchase the product after the first drop in price and the price-conscious late adopters who will wait for the price to reach the lowest possible point before making a purchase.
Another factor that influences a drop in pricing is the production of a newer model of the product or the production of a similar product by a rival company. The skimming pricing strategy has been utilized by various celebrities when they launch a product or service. It has also been used by many companies that produce new technologically improved products such as smartphones, game consoles, smart televisions, digital cameras, laptops, and smartwatches. Companies that produce software may also use the skim-the-top pricing strategy.
Businesses are often able to implement the price skimming strategy due to the first-mover advantage that is often prevalent in emerging markets. Thus, they enjoy the benefit of partial market monopoly due to the absence of competing products. They are further able to compete favorably with competing firms that may emerge over time as they can adjust their pricing to reflect the current market condition. Thus, they may still enjoy higher patronage even with the increasing competition since their brand is likely to be already well known.
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What are the benefits of skimming pricing?
The main benefit of skimming pricing is a company’s ability to recoup a significant amount of its investment in the various processes that result in the production of the new product within a short period. Another benefit is being able to maximize profit by catering to a larger market demography due to the reduction in prices over time.
Skimming pricing strategy examples
A good example of a company that uses the price skimming strategy is Samsung Electronics. This is especially prominent in the Television manufacturing division where they have been producing TVs since 1998. Through the years, they have become a leader in the market through their innovative and disruptive TV sets. From black and white TV to color TV, analog to digital television, and now, digital to smart television. This continuous evolution enables the company to charge a high price during the launch of new TV models and gradually reduce the price as other TV producers get to adopt the technology and produce similar products.
The Apple company is another good example of a company that uses the skimming pricing strategy. When it first released its smartphone, the iPhone 1 on June 29, 2007, it was priced at $499 and $599 for the 4GB and 8GB models respectively. But by September 5, 2007, the price had been drastically reduced to $399. Since then, the company has produced several versions of the iPhone with the latest release in 2022 being the iPhone 14 Pro and Pro max that range from $999 to $1499. As newer versions of the iPhone get released, the price of the older version reduces gradually to cater to a wider customer base while the new version is highly-priced for the early adopters.
This skimming pricing strategy ensures that the company recoups the money sunk into the research, development, and production of the new iPhone within the shortest possible time. As the novelty of the phone decreases or a new version gets released, the price gets lowered to increase sales through purchases from price-sensitive consumers.
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Advantages of price skimming strategy
- Price skimming can maintain the brand’s image of creating prestigious products. This often builds trust in the brand’s ability to produce quality products.
- The sunk cost of production can be recovered within a shorter period.
- It ensures that the product is made affordable to different classes of consumers over time. Hence the company can make the maximum profit from all its sales.
- Early adopters are likely to become loyal customers of brands that use this marketing strategy as it offers them a sense of exclusivity. They can be also very useful in giving the needed feedback on consumer experience which aids brands to make adjustments where necessary.
Disadvantages of skimming pricing strategy
- The previously high price may annoy early adopters especially if the price drop is too sharp or too soon after the product release.
- Price skimming may attract stiff competition especially if they can reproduce a similar product within a short time from the product release. They may also price it lower which can upset the effectiveness of this pricing strategy in the long run.
- If the brand is unable to clearly communicate the benefits of the new product, it may not attract the needed number of purchases by early adopters to recoup its initial investment.
- This pricing strategy works best when the demand
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When is the skimming pricing strategy used?
The skimming pricing strategy is used by well-known companies when they launch a new product or service that required a considerable amount to cover for its research, development, and production. It is also used by companies when they are entering an emerging market with little or no competition. In a situation where competition already exists in the market, then the product should be one that cannot be easily replicated by the competition. This can be either due to patents and other rights that the producers have over the product which ensures that the high price will not attract competitors due to the legal restrictions.
Additionally, the presence of a significant number of prospective buyers that can purchase the product despite the high price is an added advantage. It enables businesses to capitalize on early adopters and undercut future competitors due to their prolonged presence in an already-developed market. The skimming pricing strategy can also be used when lowering the price of the product over time does not significantly impact the company’s profitability nor impact consumer perception of their brand in providing exclusive and high-quality products in the future.
Price skimming may also be used by manufacturers when there is a high demand for a particular product but the supply is low. The company will usually charge a high price during this period of low supply and gradually reduce the price to match market conditions as more products are made available. Furthermore, it can be used to price products that have been perceived as innovative and essential products to own.Last Updated on November 2, 2023 by Nansel Nanzip Bongdap
Blessing's experience lies in business, finance, literature, and marketing. She enjoys writing or editing in these fields, reflecting her experiences and expertise in all the content that she writes.