Why skimming price strategy

A skimming pricing strategy usually involves setting a higher price for a new product when it first enters the market. As the product evolves, the price drops accordingly. Price skimming is often used with high-tech products.

When the technology is new, there is little competition out there to match it. The company can charge a higher price for its exclusivity, then reduce the price when competitors are able to reproduce the technology.

The idea is that early adopters are willing to pay a premium to be the first ones to get their hands on the new product. This helps businesses cover the cost of innovation and development while also creating wider market demand through word-of-mouth marketing.

Once the product has been on the market for some time and is no longer the latest must-have, companies must reduce the price to reflect its value to a wider demographic accurately.

One way to think of price skimming marketing is in layers of customer segments. As each layer or segment is skimmed off the top, the price drops to attract the next layer of customers according to what they are willing to pay. The first-generation iPhone generated a high level of buzz due to its innovative design. Apple consistently follows a skimming pricing strategy with its new products.

For price skimming to work, a company should ideally fit the following criteria:. It already has a crowd of followers who are willing to pay for new technology. Content Compliance Check your product sheets on your distributor's websites. Distribution Channel Analysis Monitor your distributors' product assortments. Digital Shelf Benchmark Analyse your brands digital presence. Tips for implementing a price skimming strategy Request a demo.

The importance of marketing Every price skimming strategy should be accompanied by a good marketing and publicity campaign to attract the attention of possible buyers, generate high expectations about the new products or services, and create demand. The subsequent price update In the medium and long term, the high prices defined for the price skimming strategy should be gradually updated and lowered to establish a level number of sales and reach the public who has a lower willingness to pay.

Angela de la Vieja. The skimming strategy gets its name from "skimming" successive layers of cream, or customer segments, as prices are lowered over time. Price skimming is often used when a new type of product enters the market.

The goal is to gather as much revenue as possible while consumer demand is high and competition has not entered the market. Once those goals are met, the original product creator can lower prices to attract more cost-conscious buyers while remaining competitive toward any lower-cost copycat items entering the market. This stage generally occurs when sales volume begins to decrease at the highest price the seller is able to charge, forcing them to lower the price to meet market demand.

Skimming can encourage the entry of competitors since other firms will notice the artificially high margins available in the product, they will quickly enter. This approach contrasts with the penetration pricing model, which focuses on releasing a lower-priced product to grab as much market share as possible.

Generally, this technique is better-suited for lower-cost items, such as basic household supplies, where price may be a driving factor in most customers' production selections. Firms often use skimming to recover the cost of development. Skimming is a useful strategy in the following contexts:. When a new product enters the market, such as a new form of home technology, the price can affect buyer perception.

Often, items priced towards the higher end suggest quality and exclusivity. This may help attract early adopters who are willing to spend more for a product and can also provide useful word-of-mouth marketing campaigns. Generally, the price skimming model is best used for a short period of time, allowing the early adopter market to become saturated, but not alienating price-conscious buyers over the long term.

Additionally, buyers may turn to cheaper competitors if a price reduction comes about too late, leading to lost sales and most likely lost revenue. A skimming pricing strategy is an especially effective marketing tool if you release your product in limited initial runs, creating the impression of scarcity and prompting a cycle of limited supply and increased demand.

When you sell your products for higher prices, the retail businesses you partner with earn extra as well. In addition, if you create marketing buzz by promoting your product as a premium item, you'll help lure customers into businesses that carry it. While they're there, they're likely to buy other items, as well, increasing the benefits for your retailers and distributors.

Devra Gartenstein founded her first food business in