What is skimming pricing strategy?

Skimming pricing strategy refers to a pricing tactic where a business initially charges a high price for a product, especially a new product, and then gradually lowers the price over time. It is a strategy typically used when launching a new product that is highly anticipated, in limited supply, or offers unique features that differentiate it from existing products on the market.

Table of Contents

When is skimming pricing used?

There are several situations where skimming pricing makes sense as a strategy:

New, innovative products – When a product is truly new, innovative and in high demand, customers may be willing to pay a premium price initially. This allows the business to maximize profits during early adoption.
Limited initial supply – For products with limited initial production volumes or availability, skimming allows the business to gain maximum revenue from early adopters before costs reduce and production increases.
Premium positioning – Skimming helps position a product as high-end, exclusive or prestige. The high price denotes quality, status or exclusivity that attracts certain customer demographics.

Tech products – Electronic products like smartphones, game consoles and new tech gadgets lend themselves well to skimming as early adopters rush to buy the latest offerings. Prices can be reduced later to attract mass market buyers.
New product categories – When launching new product categories, skimming helps recoup development costs quickly while raising awareness with premium pricing.
Price inelastic demand – Skimming works best on products with relatively price inelastic demand, where changes in price have little influence on sales volume.

Advantages of skimming pricing

There are several potential benefits for companies that decide to adopt a skimming pricing approach:

Maximizes profit margins – Skimming maximizes profit margins on each unit sold during early stages of the product lifecycle when costs are higher.
Recovers development costs – The high initial pricing helps recoup product research, development and launch costs more rapidly.

Less price sensitive customers – Early adopters are often less price sensitive and willing to pay more for a desired new product.
Builds aspirational brand – Skimming helps build an aspirational brand image that attracts high-end clientele willing to pay premium prices.
Generates word-of-mouth – The high product visibility and conversation it sparks can drive strong word-of-mouth advertising, further driving sales.

Limited supply can be met – When supply is limited during a product launch, skimming ensures limited quantities sell out without needing to ration products at low prices.

Disadvantages of skimming pricing

There are also some potential downsides for companies using skimming pricing strategies:

Narrows customer base – High prices deter mainstream customers, narrowing the customer base to only high-end market segments.

Invitation to competitors – High margins invite new competitors to enter the market who may undercut on pricing.
Demand assessment difficult – It can be challenging to determine the right skim price that balances profit margins against customer acceptance.
Price reductions problematic – Cutting prices later on can be problematic as initial customers may feel ripped off.

Perception may change – Lower prices later on can affect brand positioning and luxurious perceptions developed during the skimming phase.
Mass market may not materialize – There is a risk the intended mass market at lower price points may not actually materialize as expected.

Examples of skimming price products

Some examples of products commonly marketed using a skimming pricing strategy include:

New smartphone models – Newly released iPhone and Android devices.
Vehicles – High-end sports cars, luxury vehicles.
Designer clothing and accessories – Brands like Gucci, Prada, Louis Vuitton.

New computer game consoles – PlayStation, Xbox, Nintendo releases.
Software – Adobe Creative Suite apps, Microsoft Office.
Electronics – High-end televisions, surround sound systems.

Toys – “Must-have” toys during holiday seasons.
Books – Highly anticipated new book releases from famous authors.
Cruise or air travel packages – To exotic, luxury destinations.

Live entertainment – Concerts, shows and residencies by big-name artists and performers.

Key considerations when skimming pricing

Some important factors to consider when utilizing a skimming pricing approach include:

Getting the initial price point right is critical – Price it too high and sales will be miniscule.

There must be a suitable price-insensitive market segment willing to pay the high introductory price.
The product differentiation and competitive advantage must be strong to justify the high pricing.
Production costs need to be reducing over time so margins can be maintained as prices are lowered.

Don’t skim prices for too long or competitors will undercut and erode market share.
Manage pricing downwards in a controlled way while emphasizing added value.
Consider bundling extra features, warranties or service plans as prices decline to add value.

Get the timing right – skim pricing works best for true new product innovations.

When to abandon skimming pricing

There are certain signals that indicate a company should abandon skimming pricing:

Sales volumes are extremely low and price is deterring the target market.

Significant price cutting by competitors who can afford lower margins.
Production costs do not fall over time as expected.
New competitive products or substitutes enter the market.

Initial demand from innovators and early adopters has been satisfied.
The product advantage is no longer unique or highly differentiated.
Overall revenues are starting to decline due to pricing.

The market is highly price sensitive and focused on value over exclusivity or prestige.

Transitioning from skimming to normal pricing

When transitioning away from a skimming approach, there are some best practices companies should follow:

Plan a phased series of scheduled price reductions right from the outset.

Clearly communicate each price reduction as providing greater value for money to customers.
Use versioning – introduce “lite” versions with fewer features at lower price points.
Make pricing reductions coincide with significant product design changes or feature upgrades.

Tier pricing carefully, maintaining enough separation between price points.
Use bonus packs, bundles and other incentives as prices decline to add perceived value.
Develop lower-cost production and distribution processes to maintain margins.

Redirect marketing to emphasize affordability, value and new target mass market segments.

The skimming pricing strategy in 5 steps

If utilizing a skimming pricing approach, here is an overview of the key steps involved:

Assess the market – Research the target market, competitors and pricing sensitivity for the new product. Identify a market segment less sensitive to pricing.

Establish exclusivity – Develop a unique product with clear competitive advantages and limited availability able to command high prices initially.
Set introductory pricing – Using market research and cost inputs, determine the optimal high introductory price based on perceived value and willingness to pay.
Manage price reductions – Incrementally reduce pricing over time in line with planned schedules and production cost declines.

Transition to normal pricing – Move pricing down to normal market competitive levels once mass market demand takes over.

Conclusion

Skimming pricing can be highly effective for maximizing revenues during launch of an innovative new product with clear competitive differentiation. However, timing price reductions right as competitive pressures increase is crucial. This pricing strategy requires careful research to identify the optimal skim price point and targeted consumer segments less sensitive to price. Done right for the appropriate premium product launch, skimming pricing can boost profit margins while helping establish an aspirational brand image.