Choosing a pricing strategy is a defining point in the life of a business — it decides the customer segments a business caters to, how much profit it will make, and the overall brand image of the endeavour.
Price Skimming is one of the pricing strategies employed by businesses out of a host of different pricing models. Simply put, Price skimming is a pricing strategy in which the price of goods and services is highest at the time of launching a product to maximize profits from upper-market segments, and then lowered later on to attract price sensitive mid-market and lower-market customers. Under the price skimming strategy, prices are usually kept high until there is little or no competition and lowered when competition arises.
Price skimming works well for innovative products, where a firm is the first to enter a market. In such cases, it helps companies launching breakthrough products recover money spent in research and development before pricing pressure seeps in due to competition.
Apart from breakthrough innovations, Price Skimming also works in markets when a company has a cult-like fan following that cares little about competitive products of other brands.
Price Skimming Examples
The way Apple uses Price Skimming is pure genius, making it one of the best examples of the Skimming Pricing model. Every time the company releases a product, it’s so exorbitantly priced that it almost seems as if Apple wants to dissuade consumers from buying. Yet, Apple enthusiasts always queue up outside stores to get their hands on the latest iPhone.
When Apple comes up with a new iPhone, it usually slashes the prices of older iPhones. By doing so, Apple is able to slice its premium customer segment into further, smaller segments, extracting the maximum benefit from its customer base.
In 2006, Sony launched its Playstation 3 for $599 in the United States. After competitors released consoles like Xbox 360 & Wii, and Sony itself introduced Playstation 4 in 2013 & Playstation 5 in 2020, prices for Playstation 3 were slashed to below $200.
Advantages of Price Skimming
Due to the nature of how it works, the price skimming strategy helps brands extract the maximum possible revenue & profit from customers. The increased revenue and profits derived from employing this strategy enables brands to recoup research and development costs & marketing expenses.
A higher price, despite not necessarily having something to do with it, is often associated with higher product quality. To add to that, it makes the ones buying the product feel like they’re part of an elite club that not everybody can enter, also making the ones who can’t necessarily afford the product aspire to buy it someday. Coupled together, the previously mentioned factors attract status-conscious customers, helping with brand building in the long run.
Effective Market Segmentation
In the traditional method of market segmentation, one would create differently priced products for different customer segments. With Price Skimming, you create one product but reap monetary benefits from all customer segments, earning the greatest possible profits from different customer segments as you reduce the price.
Disadvantages of Price Skimming
Doesn’t Work in a Crowded Market
Price skimming, as a strategy, leverages the scarcity of supply and abundance of demand. It is more suited in markets like premium clothing & cars where artificial scarcity is also created through brand loyalty. In the case of a newly launched tech gadget, tech enthusiasts might be dying to get their hands on it, creating supply scarcity. However, in markets like telecom where competition is tough & consumers are less sensitive to brands, price skimming might do more harm than good.
When competitors see how much money can be made by selling the product, they’ll enter the market with a similar product at a lower price. When this happens, the company to first come up with the product might be forced to reduce prices, even earlier than planned in a few cases.
Damages Customer Loyalty
Price skimming might offer brand-building benefits but it can also damage customer loyalty if not executed well. For example, an early buyer who buys the product at a high initial price might feel ripped off if the prices are slashed immediately after buying the product. Once customers understand a brand is engaging in price skimming tactics, they might also decide to wait until prices are reduced. Some, who might consider the tactic unethical, might also boycott the brand completely.
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