Skimming Pricing Strategy: Definition with Examples

The strategy of price skimming means a company will set the prices of its products high initially but will eventually and gradually bring down the prices. It is safe to say that the skim pricing strategy does not work in many sectors and industries. B2B and contract-based what is skimming pricing are examples of sectors the use of price skimming strategy does not bring any benefit to both the business as well as the consumer. The technology, automobile, and clothing sectors are industries where the price skimming strategy works really well. The skim pricing strategy is most effective when the product follows an inelastic demand curve – a demand curve where the quantity of the product is not majorly affected by the change in prices. In case a product does not follow the inelastic demand curve, it leads to fluctuations in sales where it might cause increased demand when prices are lowered and vice-versa.

Although price skimming can benefit specific businesses, it also comes with some disadvantages merchants need to be aware of before pursuing it. Read more to learn about how price skimming works and how to implement price-skimming strategies effectively. Discover skim pricing, how it works, and how to decide if it’s the right pricing strategy for your business. Price skimming requires an ample pool of customers with enough disposable income to buy a product at above-market prices.

Needs Inelastic Product Curve

A price skimming strategy tries to get the highest possible profit from innovators and early adopters. As the demand from these two consumer segments fills up, the price of the product is reduced, to target more price-sensitive customers such as early majorities and late majorities. For instance, tech companies often spend millions on developing new products. They can quickly recoup these significant costs by setting a high price at launch. The pharmaceutical industry sees R&D costs for new drugs averaging $2.6 billion, and initial high pricing helps recover these investments.

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It’s because such items are everybody’s needs, and everyone expects a lower price. Though effective, price skimming works best for highly innovation products or products with a high perceived value. It’s less successful for follow-up competitor products because the early adopter market may already be saturated. If you check at least one of those boxes, then a price skimming strategy is worth considering. Finally, price skimming also provides room to change pricing as the market shifts. Businesses often need to make short-term price changes depending on market conditions, competition, customer feedback, and more.

1. By targeting consumers with a high willingness to pay, these companies can recover costs rapidly.
2. When you are doing all this, you would of course keep the price of the product high to get the benefits in return.
3. A price shock in B2B business hinders companies looking to generate steady revenue.
4. As these early customers are satisfied and competitors enter the market, the company reduces prices to attract more price-sensitive consumers.
5. Skim pricing (or price skimming) can be highly effective for businesses that offer innovative products and have a system to attract price insensitive customers.

The Disadvantages of Price Skimming

Therefore, the pricing strategy is largely effective with a breakthrough product, where the firm is the first to enter the marketplace. In such a strategy, the goal is to generate the maximum profit in the shortest time possible, rather than to generate maximum sales. This enables a firm to quickly recover its sunk costs before increased competition and pricing pressure arise.

Pitched with much fanfare and a memorable marketing campaign, iPhone went on to sell 1.39 million units in its first year, and there are now over a billion iPhone users worldwide. Gaming brands like Xbox and PlayStation notoriously use price skimming to launch each new version of their consoles. Die-hard fans flock to stores worldwide to be the first to own the latest model, even when new features may not represent excellent value.

The price changes taking place in this method are useful in targeting early adopters when the brand’s primary focus is not the mass market. While Sony is well-known for its TVs and smartphones, we can observe price skimming strategy in action on their gaming console lineup. But while the PS2 was conservatively priced, the company knew that there were lots of potential buyers for the PS3 and hence set a higher initial launch price.

Their marketing strategies are often directed towards advertising new product functionalities and count on consumers willing to pay a higher price for a sense of exclusivity. Salesforce was one of the key proponents of the price-skimming philosophy in SaaS. The company provoked an entire paradigm shift in the SaaS industry to power its pricing strategy. Salesforce was the first company of its kind to make its CRM available at all times through the cloud. Later on, it was able to scale down to accommodate smaller businesses that also clamored to use the cutting-edge CRM.