What is Price Skimming? Pros & Cons of the Strategy

Skimming is one of the most profitable pricing strategies because it allows retailers to capitalize on new products efficiently. This article explains how price skimming works, which benefits it brings to sellers, and when it should be implemented to achieve maximum results. Make sure to read our guide to the end: we will also share tools for price monitoring and optimization.

Price skimming is a strategy applied to newly-launched products: the seller charges the highest price that customers are ready to pay. When competitors start introducing substitutes, the seller starts lowering the price in order to attract more price-sensitive market segments. The approach is called so because retailers “skim” the profits of the market segment they’re appealing to by releasing goods that are fresh and unknown to the audience.

This strategy is commonly used when a product with a new design or features is introduced on the market. In the beginning, it can be priced high because there are no analogs, but as competitors come up with similar goods, the retailer has to charge less for the product.

First, it should be mentioned that price skimming works best for fresh products that have some unique properties (new flavor, innovative features, upgraded functionality, etc.). Otherwise, it will not be appealing for buyers.

In order to implement a price skimming strategy, you need to manage the life cycle of your product after its release. Once it hits the shelves, the demand for your product will probably be the highest. By focusing your positioning on upper market segments, you can redeem the cost of development and make more initial profit.

Right after the release, your product is likely to have minimal direct counterparts on the market. By the time the competition for your product appears, you will have your reputation established thanks to a group of satisfied customers. At this point, you will be ready to switch your positioning to lower market segments.

Hence, price skimming allows a retailer to reach every segment of his target market and earn the maximum revenue that these buyer categories can generate. If used correctly, skimming can become a nice countermeasure against competitors trying to enter the market using penetration pricing.

Price skimming is regularly used by tech giants like Apple and Samsung. For example, when Samsung launched its flagship model Galaxy S20 in 2020, the price was $999 on the day of release - this marked the beginning of their price skimming strategy. One year later, Galaxy S21 was introduced (with the highest price possible), which made the cost of the Galaxy S20 plunge to $600 as a logical ending of ts price skimming cycle. Hence, Samsung made profit on both market segments: A (early adopters) and B (price-sensitive buyers).

Another company that uses a price skimming strategy pretty often is Nike. When they introduce a new design to the market, they charge a lot to reap profit from brand fans who don’t mind paying more for an exclusive pair of shoes. After a while, the cost of the sneakers is lowered.

A price skimming strategy comes with a lot of benefits in terms of profit and marketing.

By charging more during the launch of an innovative product, especially in the IT and electronics industries, you can compensate for development and promotional expenses pretty quickly. Companies like Apple capitalize on technological advances introduced with each new series of iPhones and iPads: they charge the highest prices right after a highly-anticipated gadget is released. Meanwhile, the prices of the previous models drop significantly.

If you spend a lot of money and effort developing a gadget with unmatched features, you should be able to charge higher prices during the launch to recoup your investment and fuel further development.

Price skimming also creates the impression of a high-end product that is a must-have for early adopters. Used at the beginning of the product’s life cycle, it allows you to establish a premium brand image that attracts customers seeking prestigious goods. Besides that, you will have enough room to lower prices when competitors’ products appear on the market.

A price skimming strategy allows you to divide your customers into several groups and target each of them efficiently. In the beginning of the product’s life cycle, you generate profit from the upper market segments because higher prices do not repel them. Later on, you can focus on more price-sensitive customers by charging less. Product pricing can be adjusted depending on the demand curve and the maximum price that potential buyers are ready to pay.

Most often, higher-priced products are welcomed by loyal customers of a brand: these early adopters love your assortment and will be glad to share their feedback. That will allow you to make a few adjustments before releasing the next product batches aimed at a wider user base. Promotion among brand evangelists helps you build a product reputation that persuades new customers to buy at a more agreeable price.

Here are a few drawbacks of price skimming that should be considered before you decide to introduce this strategy.

Price skimming works well for inelastic products, i.e. when the sales volume is not impacted by changes in price. Apple is a good example: the brand has gained the trust of the audience and its customers do not mind paying extra for advanced technologies. In cases like this, demand will not change dramatically if a product is overpriced. If the demand curve for a product is elastic, price changes will greatly impact sales volume. A company should try to make a product as inelastic as possible by emphasizing its unique features and indispensability for users.

Unless you come up with an unmatched innovation, using a skimming strategy in a busy market is most likely to fail. In any industry you need to evaluate customers’ buying power and analyze the competition before setting prices. If you have many competitors, the demand curve is quite elastic, so high prices may repel customers.

When a product is innovative and helpful for customers, competitors don’t miss a chance to come up with alternatives. Your success and profits at the beginning of the product’s life cycle will catch their attention, so the elasticity of demand will start reducing as new products appear. With skimming pricing you win more time to capitalize on your innovation because the customer adoption rate is slowed down, and other brands will start imitating and improving your product only after seeing you thrive.

The most devoted customers buying your product first might become your biggest pain in the neck. If prices are reduced too much or too quickly after the product release, buyers think they have overpaid. Imagine the cost of your brand-new smartphone falling by $300 overnight. How would you feel? Frustrated, or worse, angry.

Fast price drops may trigger demand growth, but the most loyal customers might be upset. As a result, some of them will ask for a price adjustment or leave negative reviews.

When crafting a pricing strategy, you should set clear goals and needs for your business. While price skimming can be successfully used during the release of new products, it is not applicable to all goods. It should be understood that this is a short-term pricing strategy that cannot maximize profits for years.

A company should consider price skimming if:

• Its brand is acknowledged and trusted. It is easier to sell expensive products to a loyal customer base who are willing to pay a higher price. Their trust is based on previous experience, and new customers are likely to pay more to a company with positive reviews and a good reputation.
• Higher pricing can be justified. The product should have some extra value: high quality, innovative features, exclusive design, etc.
• It can monitor the market and quickly adjust prices. Once a new successful product appears, other brands start reacting. A company should adapt prices accordingly to stay competitive. If they can’t afford to lower the product cost, this pricing strategy will not work.

The latter point seems to be a real challenge, but not when you have powerful price monitoring solutions at your fingertips. Priceva offers competitor price monitoring and price optimization software that allows you to keep tabs on market dynamics and get actionable insights. It crawls retailers’ websites to gather relevant pricing data, provides statistics in the form of easy-to-read charts, and comes up with pricing suggestions based on the elasticity of demand. By automating market research, you save time to focus on business growth and development.

A price skimming strategy is a great option for getting a market share and outperforming competitors. Coupled with powerful pricing software, it can be very profitable in the short- and even mid-term. With price skimming, you can recoup initial investments, position your product to attract customers who can afford luxury prices, implement market segmentation, and gather data to fuel the following pricing strategies.

A price skimming strategy means charging the highest price at the beginning of a product’s life cycle, and lowering the price as competitors introduce alternatives. This approach allows companies to recover development and marketing expenses by capitalizing on different market segments.

When a unique or innovative product is released, a brand charges the maximum price because there are no substitutes available yet. Hence, in the beginning, the retailer ‘skims’ the profit from customers who are ready to pay more.

This is an absolutely legal practice around the world. The only risk a retailer faces is repelling customers with a high price. If the product is not valuable enough for the audience, they will not be ready to overpay. Also, some buyers may ask for price adjustment if the product’s cost drops significantly over a short period of time — and this will be a legal request.

A skimming pricing strategy is recommended for reputable brands. They have already built trust among the audience, so buyers are more willing to pay extra for high quality, innovative features, exclusive design, etc. The strategy is not likely to work for new brands: customers do not understand whether a product is worth its cost.

A company should calculate development, production and marketing expenses: a correctly performed price skimming strategy allows them to recover within a relatively short time frame. Also, do not forget that you will have to lower prices throughout the product’s life cycle, so the initial price should allow you to do that without compromising your profit margin.