Pricing your new product might seem like the easiest decision your business has to make, but the truth is, your pricing strategy can massively influence the type of customers you attract and their perception of the quality of your product. Price skimming allows you to maximize profits from early adopters before dropping the price gradually to attract more price-conscious consumers.
TL;DR (Too Long; Didn't Read)
With price skimming, a business will charge a high price during an introductory phase before gradually lowering the price as demand increases.
What is Meant by Price Skimming?
Price skimming is the strategy of setting the price of a new product high to create a perception of quality and exclusivity. The idea is to capture the early adopters who are happy to pay more for cutting-edge products, and who can evangelize about your product. As the trendsetters spread the word, your brand becomes more attractive to the rest of the market. Then, you gradually lower the price to increase sales to more price-conscious consumers, following the demand curve. It's called "skimming" because you're skimming customers off at each price point.
Price Skimming Pros and Cons
Beside creating an aura of prestige around your product, price skimming is a good way to recover the costs your business has spent on product development. Research and development costs can be expensive for new innovations, and price skimming gives you the opportunity to break even in your first few sales. On the downside, you may be risking customer loyalty as you begin to drop your prices. The consumers who paid the previously higher price may cry foul in the face of dramatic price drops and leave negative feedback about your brand.
Price Skimming Examples
The fast-moving consumer technology market provides some good examples of price skimming. When Apple introduced the iPhone 5, for example, it sold for $649 for a 16GB version. Two years later, the company reduced the price to $549 and the new iPhone 6 took over the $649 price point. What we're seeing from Apple now is a slight twist on the traditional price skimming strategy. The company reserves it highest price point for its latest iPhone and maintains that price point until a future iteration comes along.
Price Skimming Versus Price Penetration
Penetration pricing is roughly the opposite pricing strategy from price skimming. Rather than offering a new product at a high price to attract an exclusive set of eager customers, you instead launch a product at a low price with the goal of luring the largest contingent of customers. If the product price is low enough, consumers will flock to the new product away from competitors. The idea is to increase both sales volume and market share.