Skim pricing is a popular strategy when launching new products. Discover skim pricing, how it works, and how to decide if it’s the right pricing strategy for your business.
Skim pricing is a pricing strategy that targets early adopters willing to pay a high price tag for new technology. This helps you increase early profits before dropping the price later as competitors enter the market. Understanding when and how to use skim pricing can help you decide on the right pricing strategy for you and promote long-term business success.
Skim pricing, also known as price skimming, is a pricing strategy that sets new product prices high and subsequently lowers them as competitors enter the market. Skim pricing is the opposite of penetration pricing, which prices newly launched products low to build a big customer base at the outset.
Businesses adopt a skim pricing model for several purposes, including:
Generating high short-term profit
Attracting early adopters
Segmenting customers as the price drops, according to what they are willing to pay for a new product
Big brands like Apple and Nike tend to do well with price skimming and provide excellent price-skimming examples to examine:
Apple periodically introduces new iPhones with the latest features at a high price, attracts price-insensitive customers who value having the latest device to hit stores, and then sells them at lower prices to price-sensitive customers as newer versions are introduced.
Nike, an athletic apparel market leader, regularly introduces new designs at higher prices, relying on early adopters and loyal customers to purchase products at the introductory price. These prices can last for several months before Nike lowers the cost to sell the remaining inventory to price-sensitive customers.
The opposite of skim pricing is penetration pricing, which prices new items low to build a customer base. To decide which is right for you, consider whether you prioritize short-term profit versus maximizing market share, or attracting your most-interested customers versus building a strong customer base from the beginning.
As you consider skim pricing for your business, consider this strategy’s advantages and disadvantages:
Potential advantages | Potential disadvantages |
---|---|
Attracting early adopters who value having the latest products | Difficulty justifying initial high price |
Generating revenue quickly | Difficulty entering a crowded market |
Reaching the break-even point with fewer sales | Attracting competitors who offer similar products at a lower price |
Associating high-priced products with quality | Alienating early adopters who see others purchasing a product at a lower price than they paid |
Offering retailers a higher initial profit margin | Being seen by consumers as pricing products unethically |
Earning maximum profits from different customer segments as price drops | Creating a higher customer churn rate |
In addition to knowing the potential advantages and disadvantages of skim pricing, it’s helpful to evaluate your products and look for the four signs below before committing to a price skimming strategy.
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U.S. Federal Taxation of Individuals & Businesses. Learners will develop knowledge in U.S. federal taxation as applied to individuals and businesses.
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Price skimming is generally not a viable strategy in a crowded market, as consumers will have their pick of comparable products at competitive prices. Examine your industry and the market segments you are targeting for opportunities to introduce new products at an initial high price.
Is your product among the first (if not the first) of its kind?
What do similar brands offer?
How might you market your products to price-insensitive early adopters?
As with the Apple and Nike examples, you may be able to succeed with a price-skimming model if you are launching a product that consumers perceive as innovative and an indispensable must-have.
What are your product’s unique features?
What makes it one-of-a-kind and the result of careful research and development?
How can customers use it in ways that truly make a difference in their lives?
How can you ensure that the product’s quality surpasses what’s currently available?
What makes it difficult for competitors to emulate?
Conduct market research and review your current customer base to learn more about potential price-insensitive early adopters in your market segment. You may be able to leverage their must-have mentality.
Have segments of your current customer base become repeat buyers and thus loyal to your brand?
Do they perceive your brand as offering higher value than other brands?
Do these consumers behave like early adopters and take pride in being the first to get the latest products on the market?
Do they tend to expect higher prices?
When price changes do not affect the demand for a product, it’s called an inelastic demand curve. In other words, the need for your product would stay the same whether you lower or raise its price. Examples of such products include gasoline or toilet paper.
Consider the following factors to help you determine your product’s demand curve:
Consumers’ budgets: If buying your product would consume a large portion of a consumer’s budget, price changes would have a greater effect on demand. (Elastic)
Competition: If consumers have fewer products like yours to choose from and no viable substitutes, price changes would have less effect on demand. (Inelastic)
Necessity: If consumers view a product as necessary, such as a life-saving medication, price changes will likely not affect demand. (Inelastic)
Skim pricing (or price skimming) is a pricing strategy where you price your new item high, then lower it as competitors enter the market. This can be highly effective for businesses that offer innovative products and have a system to attract price-insensitive customers. It’s critical to research the market and consumer demand as you explore pricing strategies and choose the one that makes the most sense for your business goals.
Skim pricing can help you increase short-term profit and attract early adopters when launching a new product. You can learn more about pricing strategies by taking an online course on Coursera. If you’re ready to maximize sales and profit, make effective pricing decisions, and gain a deeper understanding of customers’ responses to product pricing, consider taking the Pricing Strategy Optimization Specialization offered by the University of Virginia.
specialization
U.S. Federal Taxation of Individuals & Businesses. Learners will develop knowledge in U.S. federal taxation as applied to individuals and businesses.
4.8
(732 ratings)
23,555 already enrolled
Intermediate level
Average time: 3 month(s)
Learn at your own pace
Skills you'll build:
Business Analysis, Federal Income Tax, Tax Accounting, IRS Regulations, Pass-Through Entity Taxation, Corporate Tax, Depreciation, Amortization, Capital Gains and Losses, Property Taxation, Nontaxable Exchanges, Tax Deduction, Form 1040 Preparation, Individual Taxation, U.S. Federal Tax, Tax Deductions, Self-Employment Tax
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