Price skimming is a pricing strategy that can facilitate a higher return on early investments, influence the branding and appeal of a product, and allow a brand to target specific segments of a given market.
Brands use price skimming to optimize revenue and margin across the lifecycle of a product, skimming off market segments. Furthermore, it helps maintain a better ROI regarding research and product development. Customers who are most loyal or seek premium products are more likely to pay top price. The subsequent skimming allows lower price points to attract the rest of the market.
In this guide, you’ll learn:
- What is price skimming?
- Price skimming strategy
- Price skimming vs penetration pricing
- What are the advantages and disadvantages of price skimming?
- Ways to compete against predatory pricing and gain e-commerce sales
What is Price Skimming?
Price skimming is a pricing strategy often related to innovative and high-demand products. Brands set a high price ceiling for new products due to market analysis and consumer demand.
The top layer of loyal customers buy at high prices. A retailer then pivots to accommodate new layers of consumers by slowly lowering the price over time. Retailers continue in skimming pricing until it levels-off at a base price.
Retailers initially set prices high due to demand and then slowly “skim” the price down as the novelty of the product decreases and accessibility to it increases.
Samsung uses price skimming strategy in regards to its mobile phones. When customer demand is high due to a new release, the price is set to attract the most revenue. After the initial fervor and hype wanes, Samsung adjusts price points to suit more consumers in the market.
Samsung initially leverages price skimming to take market attention and share away from their main rivals. For example their Galaxy phones were priced to take share away from the iPhone.
Price Skimming Strategy
Price skimming involves targeting top-level consumers, those who buy at premium prices. Lowering price ensures a brand aligns price points with more customers.
Nike, a serial manufacturer and retailer of shoes and clothing, applies price skimming to popular trainer releases. This is done by charging premium prices for new products and limited releases.
Brand’s at the top of their market like Nike, have no trouble setting prices high. High prices are warranted by the demand for its trainers and loyalty to the Nike brand. Months after a release, Nike lowers prices to accommodate more layers or subsets of customers, those who are more willing to buy the product at a sales price.
The dynamic between online and offline sales adds another layer of strategy. Retailers need to align in-store and online prices, for the Ropo Effect (research online buy offline) may increase in-store sales.
Price Skimming vs Penetration Pricing
Successful retailers remain agile regarding pricing strategy, for setting prices low or high can be fortuitous. Price skimming and penetration pricing differ in application despite being equally useful.
Penetration pricing involves setting a lower price point as compared to market competitors. It allows a brand to gain exposure in a crowded market, quickly gaining market share via consumers looking for sales prices.
Penetration pricing also helps attract new users, introduces brands to a market, competes with market leaders, and helps in acquiring market share. Often, the strategy is paired with price monitoring software for optimal timing and performance.
Related Reading: Why Price Is the Most Important P
Price Skimming Advantages
1 - Supply and Demand & ROI
Premier products necessitate preparation and early investment. High price points in combination with low supply, for example the introduction of the PS5, helps recuperate earlier investments and ensures an overall better ROI. As the products availability increases over time you would then expect to see the price decrease as the demand decreases.
For example, Apple invests a lot of money into technology and research. That warrants the premium pricing of its iPhones. The high prices akin to price skimming allows Apple to reinvest the higher return on investments back into the brand, which helps strengthen its branding.
2 - Brand Image
“Sneakerheads” may pay more than 10x the retail price for a pair of popular trainers. Ownership equals prestige, novelty, and limited accessibility to them. Price skimming inspires consumer feelings and behavior that sculpts a brand’s image.
The Adidas brand’s Predator football boot has gone through many iterations over the years due to its popularity. The soccer boot was first introduced in 1994. Last year, Adidas released the Predator 20.
3 - Market Analysis
Retailers celebrate price skimming because it segments customers for deeper market analysis. Skimming allows marketers to segment customers into groups. Analysing what percentage of a given market paid premium prices is useful information to use for future products and pricing strategy.
At the moment, Sony may consider price skimming in regards to its PlayStation 5. Early adopters and brand fanatics gladly paid premier prices for Sony’s newest release. However, data reflects a trend. Sony lowered the price of its previous PlayStation products over time.
Sony sold more PlayStation 4 consoles in the third and fourth year after its release than the first two years on the market. It’s likely that Sony, observing a rising trend in gaming combined with its previous sales data of PlayStation consoles, initiated a price skimming strategy.
Related Reading: Amazon Success Strategies
4 - Pricing Strategy
Price skimming is an element of a larger pricing strategy. Some brands leverage price skimming for ROI and market analysis, but skimming price can be beneficial as a way to further inform a brand’s broader price strategy.
For example, Nike had very modest sales goals in mind upon releasing the very first Air Jordan trainers. At the time, a “sneakerhead” or the thought of paying hundreds of dollars for a pair of trainers were nonexistent. The subsequent cycle of setting premium prices for new releases followed by loyal customer purchases created Nike’s brand mystique.
Price Skimming Disadvantages
1 - Pricing Objectives
Price skimming recuperates early investments and creates a mystique around a product or brand. But, it can potentially alienate early adopters too. Emotional appeal can help or hinder a brand. Lowering the price of a previously high-priced item may irritate early adopters.
The lowered price affects early adopters, and it also means that more people are likely to own a product. That lessens its sense of prestige and exclusivity. Consider long and short-term goals along with possible reactions from loyal customers.
In 2007, the price of that year’s must-have gadget, the iPhone, was lowered from $599 to $399. This enraged early adopters to the point that Steve Jobs had to make a public apology and offered $100 Apple store credit to any iPhone owner who felt “cheated.”
Related Reading: How to Build a Pricing Strategy
2 - Reality Check
Price skimming is an incredible pricing strategy available to those offering high-demand products. Luxury brands, like Gucci and Louis Vuitton, command high prices for its highly sought clothing and accessories. These brands are at an advantage in having more leverage in setting high prices that rarely come down.
A major disadvantage of price skimming is that many brands don’t have the ability to implement it. However, Dynamic Pricing software delivers the data to make real-time pricing decisions a lot easier.
3 - Relative Competition
The decision to wage price skimming is often relative to a retailer’s competition. Setting prices high can inspire customers to buy from competitors. Price changes rarely go unnoticed by the competition!
Consider launch prices related to Xbox and Playstation products:
Annually, Xbox and PlayStation are compared. And, price is always a main focus. Any pricing maneuver from Sony is sure to be closely monitored and countered by Microsoft (and vice versa) for years to come.
Utilizing retail tools, such as Pricewatch, enables you to get real-time data pulled from a competitor’s website as well as shopping search engines.
Price skimming is another tool retailers leverage to gain market share and crush competitors. Used in combination with sophisticated pricing software, skimming prices can be tremendously advantageous.
Recover a greater return on initial investment, position products to attract premier buyers, gain greater awareness regarding customer segmentation, and use data to inform future pricing strategies.
Curious to learn about some other pricing strategies? Check out some of our other articles below.
- What is Value Based Pricing?: A full overview of how price and consumer perception works together.
- What is Charm Pricing?: A short introduction to a fun pricing method
- What is Penetration Pricing?: A guide on how to get noticed when first entering a new market
- What is Odd Even Pricing?: An explanation of the psychology behind different numbers in a price.
- What is Bundle Pricing?: Learn more about the benefits of a bundle pricing strategy
- What is Cost Plus Pricing?: In this article, we’ll cover cost-plus pricing and show you when it makes sense to use this strategy.
- Here’s What You Need to Know About Psychological Pricing (Plus 3 Strategies to Help You Succeed): Modern day pricing is so much more than a numbers game. When thought about correctly, it’s a powerful way to build your brand and drive more profits.
- How to Build a Pricing Strategy: A complete guide on how to build a pricing strategy from Omnia partner Johan Maessen, owner of Commercieel Verbeteren.