What is skimming pricing and how can it work effectively?

DEFINITION OF SKIMMING PRICING STRATEGY

It is a pricing method when a company offers its new product - typically an innovative, high-end product - at a high introductory price, i.e. at a premium price. Then, over time, as the product becomes less new and thus more affordable, it steadily reduces its price, thus "skimming" customer segments.

Price skimming is mostly used by companies that develop new products so that there is almost no competition at the point of introduction and no pricing pressure.

HOW DOES SKIMMING PRICING WORK?

This method is usually used when a new product is launched on the market. The company selects the highest price that customers are willing to pay for the product. This ensures that the company can collect as much revenue as possible until competition enters the market or demand is high enough. This can provide a quick return on investment in product development.

Which customers does the company expect in the first phase of skimming? The technology industry, for example, is looking for customers who are always committed to the latest innovations and cutting-edge technology. The fashion industry is looking for trendsetters who want new designs and fresh ideas for the next season. These shoppers are willing to take some risks for a product labeled as a 'must-have' or 'best in category' and are less price sensitive.

The first phase is considered complete when the firm has satisfied the first, or highest price demand. By this time, competitors will usually have entered the market and the moment of price reduction will have arrived. This dynamic pricing allows the firm to remain competitive.

At the time of the price cut, the second phase of skimming pricing begins. This lower price is more attractive to more price-sensitive consumers, who then start to buy the product. Theoretically, this leads to higher volumes of goods sold and generates additional revenue, but it also puts even more pressure on competitors, who at this point try to enter the market using so-called predatory pricing.

WHEN AND FOR WHICH PRODUCTS CAN IT BE USED EFFECTIVELY?

The skimming method works better for certain types of products than for others (generally speaking, the most recent models of a particular product and the most innovative ones are the most suitable). Technology or fashion companies achieve great results with this method of pricing.

In general, a skimming price strategy is appropriate when the demand curve is inelastic. This means that the magnitude of demand is not really influenced by the price, and price changes have little or no effect on the quantity demanded. Another condition for the success of price skimming is that a sufficient number of buyers are willing to pay a high price for the product and that this price does not attract competitors too quickly.

Skimming pricing is also ideal if the high price is interpreted as a sign of high quality. Therefore, so-called prestige pricing can be well combined with psychological pricing strategies. However, care must be taken here: if the price is too high or the price cut is too late, customers may turn to a cheaper product. This in turn will limit sales volume.

TYPICAL EXAMPLES

As mentioned above, price skimming is one of the most commonly used strategies in the technology industry. Almost all technology giants use this tactic in pricing at least some, if not all, of their products. Apple and Samsung are prime examples - they use skimming pricing very successfully to increase sales and attract customers.

But coming away a bit from the tech world, Nike, among others, has also used this method successfully. It sets the prices of its new products high and then lowers them at the end of the season.

An example from Samsung:

Let's take Samsung's Galaxy S20, which will be launched in 2020, as an example. On launch day, the price of this smartphone was $999. However, after the release of the Galaxy S21, the company's next flagship smartphone, the price of the S20 dropped significantly and could be found for around $600 depending on the store.

ADVANTAGES OF THE SKIMMING PRICE STRATEGY

Maximizing revenue early in the sale: by selling more products faster, the company gets a faster return on investment.

Price can be adjusted to market movements: by starting from a high price, the company can determine how price-sensitive its customers are, so it can sell as many products as possible with the highest possible profit margin. It is then up to them to decide when and by how much to reduce the price. This puts the pricing model under their control, and they can adjust the selling price as they see fit, based on market conditions and customer behavior.

It can promote brand awareness: innovative, unique, one-of-a-kind, revolutionary, new, world-beating, and prestige - these are terms often associated with products priced with a skimming strategy. If this is the image a brand is aiming for, then price skimming, properly applied, can be a good choice.

SUMMARY

In theory, skimming can therefore be a very useful strategy, but in practice, there are a number of factors to consider before deciding to use it. Firstly, the marketing strategy must be consistent with the pricing method and, secondly, the product must be of high quality and innovative to justify the high price.

Most importantly, it must be alert to competitors in order to avoid pitfalls such as setting the price too high or cutting it too late.

PriceKit's automated pricing support system also provides effective, automated assistance with one of the most important elements of your pricing strategy: monitoring competitors. PriceKit's solution gives you insight into market changes and competitor prices, making it significantly easier to determine the most appropriate pricing strategy.