What is Price Skimming Strategy? How Does It Work?
Here is a detailed article about What is Price Skimming Strategy and How Does It Work?.
In the development stage of an enterprise, whichever business has a better pricing strategy, that enterprise can more easily maximize profits in the process of selling products and services.
No customer wants to buy products with prices too high for quality, but also no one wants to purchase products at too low prices, and if the product is low, the business cannot afford the cost. Many businesses learn about price skimming strategy and apply it to solve this problem.
Go ahead to find out more.
Table of contents
- The Definition of Price Skimming
- How The Price Skimming Strategy Works
- The Pros and Cons of Price Skimming Strategy
- When You Should and Should Not Use The Price Skimming Strategy
- Real Life Examples of Successful Price Skimming Strategy Implementation
The Definition of Price Skimming
Price Skimming Strategy is a strategy where sellers set a relatively high initial selling price for new products to exploit the needs of a group of customers with high purchasing power, to recover their investment and make a profit quickly.
After exploiting all this customer group, the enterprise gradually reduces the price to exploit groups of customers with lower purchasing power.
The price skimming comb gets its name from the act of skimming the floating parts during cooking, like how businesses “skim” potential customers at the top.
This strategy is used in the following scenarios:
The firm has a temporary monopoly position, and if the demand for the product does not price elastic.
There are groups of people with high purchasing power and willing to buy on the market. They are very concerned with the novelty and uniqueness of a new product.
Manufacturing enterprises have a reputation for a high-quality image in the market.
This new item of high quality and high price contributes to the image of a high-quality product.
The initial high price does not quickly attract new competitors.
The production cost of the unit of a product when producing a small volume of the product is not too high.
A high initial price can be used to keep a demand, while the potential production scale is not sufficient to meet market demand.
Products based on high technology, investment in research and development, good customer service, high-end brand image, selective distribution system, etc. are often suitable for price skimming strategy.
In the later stages of the life cycle, when competition occurs and other market factors change, prices are then lowered. Cell phones and computers are examples of traders using this pricing strategy.
How The Price Skimming Strategy Works
As an owner, there will be many instances of sudden revenue drops or unexpected cost increases. Therefore, the price skimming strategy is often used to create a positive financial boost, maximizing revenue and profit for the company as soon as the product/service appears on the market, especially when The demand is high, and the competition has not appeared yet.
Very few customers realize the enormous time and cost that brands spend to develop a complete product in the market, especially when this brainchild has a short lifespan and is easily replaced. “Capital recovery” as quickly as possible, becomes the main goal of every business. In other words, the business’s goal at this stage is to increase revenue as much as possible. Once these goals are fulfilled, businesses can lower costs to attract another segment of more price-sensitive customers while retaining a competitive advantage over fake products appeared on the market.
Note: This strategy can also encourage competitors to enter. Once they find that your product is profitable, they will quickly chase you.
Price skimming is a pricing strategy that is the opposite of Penetration Pricing - one that focuses on launching a product at a lower price point to increase market share. Usually, Penetration Pricing will be suitable for products such as basic household appliances (under the low-involvement group), because the price can be a major factor in a customer’s purchasing decision. Meanwhile, Price Skimming is a strategy to help businesses recover the cost of developing a product of greater value (in the high-involvement group) that they have to spend initially.
The Pros and Cons of Price Skimming Strategy
Pros of Price Skimming Strategy
Margin is the rate calculated by dividing your gross income or net profit by sales. This index shows how many dong of income each dong of revenue is generated. Margin is a handy indicator when comparing companies in the same industry. A company with a higher profit margin proves that it is more profitable and has more effective cost control than its competitors.
The price skimming strategy will cause the product to be priced at the maximum. Therefore, the profit margin will be high. This will attract customers who love products and services and create a shopping trend at the beginning of the product launch.
Create a Prestigious Brand Image
The high pricing will help businesses hit on the psychology of customers that expensive goods are genuine. This will attract the attention of customers who love products and services and can create a shopping trend at the beginning of the product launch.
Combined with a good positioning strategy, a “skimmy” product will attract customers who focus on quality rather than price. The passion and sharing of these customers willing to spend a lot of money will contribute to maintaining the “premium” image of that product and creating a prestigious brand image.
As mentioned above, when a new product is initially launched, businesses will set a high price to target the high-end customer segment, who focuses more on what the product or service has to offer. Especially when your brand has a reputation in the market, there will be lots of customers willing to spend large sums of money to own the first item of your brand.
After the demand for high-end customers is satisfied and competitors gradually appear in the market, businesses will actively reduce prices to catch the remaining customer segment to continue to maintain revenue.
Real-Time Product Testing
Your brand and product enthusiasts and early adopters are the two main target audiences that will buy your product at launch. Because they are the people who are willing to buy those products at a higher initial price. Therefore, they will be customers who give you complete information and honest feedback. They will help your business better understand the performance of your newly launched product. As a result, you can learn from and improve the user experience in the future.
Cons of Price Skimming Strategy
Only Works in Short Term
In general, Price Skimming can be an effective pricing strategy for businesses in a short period of time because it allows the early-stage market with customers who prefer the experience to become saturated gradually. However, in the long run, it doesn’t help attract lower-income and more price-sensitive customers. These customers may even switch to buying your competitor’s products at a better price if you lower the price too late, resulting in loss of sales and potentially losing the company’s revenue.
Need an Inelastic Demand Curve
When the product follows the inelastic demand curve (a demand curve representing price change may have little or no effect on consumer demand), the price skimming strategy will work best. If your product does not comply with an inelastic demand curve, a fluctuation in sales will occur. This can increase demand when prices fall and vice versa. It leads businesses to have difficulty maintaining production and inventory.
Can Backfire Without Proper Execution
When you implement a price skimming strategy, mistakes can be made if done incorrectly. Most of those consequences will negatively affect your brand and your business.
Customers who bought your products first when they first launched could be the ones who easily trigger your bad PR nightmare. If you lower the price too soon, loyal customers will feel “betrayed” and never buy a new product from the company again because they think it will be discounted soon. Apple faced this backlash in 2007. Just two months after the launch of its iPhone, the company dropped the price by $ 200. The rapid drop in price from $ 599 to $ 399 may have increased customer demand, but the early adopters felt distrust and were given a short end.
Therefore, to ensure that the price skimming strategy is appropriately implemented and that the client at the top of your demand curve doesn’t get upset, you need to execute this strategy consistently. In particular, you should avoid hasty discounts. Additionally, it would help if you only implemented this strategy after doing thorough research on brand perception, customer sentiment, and market conditions.
When You Should and Should Not Use The Price Skimming Strategy
When you should use a price skimming?
If you have a unique product or are highly different from other products on the market, but can only provide a small percentage, adopting a skate price strategy will be the optimal choice. This allows you to maximize your profits and limit demand by setting a high selling price.
Besides, having the latest technology is the weapon to help you hold social currency. A good product can generate a powerful word of mouth. People who use your product early bring in a lot of revenue for you and become your permanent customers.
When you should not use a price-skimming strategy?
If your product is not new and is likely to compete immediately, then using a price skimming strategy is a mistake. Especially when your product is not attractive enough for the higher classes of the market. This also means that the product will not be powerful enough to make people have to spread word of mouth. Therefore, when your product is similar to someone else in the market or not attractive enough, you won’t see the benefits of a price skimming strategy.
Also, if you don’t have a brand image, your customer base will likely be limited, and you might have trouble if someone competes. Remember, you should only use this strategy when there are enough repeat buyers because they will create a credible word-of-mouth effect and help you avoid getting undercut in the marketplace.
Real-Life Examples of Successful Price Skimming Strategy Implementation
Currently, Apple is considered the most successful brand using the price skimming strategy globally, and it was deployed before the iPhone of the year was announced.
Regularly every year, before the grand Apple product announcement is always a series of rumors, “exposed” images appear everywhere to arouse customers’ curiosity, including fans of Apple and the “anti-fans.”
Immediately after the iPhone was announced, fans stayed up the night before the Apple Store to become the earliest iPhone owners, some even willing to pay in advance and waiting months to be able to touch the new phone.
Initial sales are also quite limited, further boosting the appeal of the iPhone each season.
Apple is considered by experts to have brought Price Skimming to new heights by continuously offering iPhone models with higher prices each year and trying to maintain the selling prices of old models, iPhones thereby creating a series of products for all customer segments, without leaving any space for other competitors to “squeeze in”.
Phone continuously appears at higher prices year after year because product quality increases, bringing Apple’s revenue to No. 1 in the technology industry.
Sony is known for its high-quality products. At the same time, these products are often sold at a relatively high price.
Sony products are often priced above the market average. The high price supports the high-end brand image, in line with the company’s overall strategy. On the other hand, the company also applies market-oriented pricing for some of its products. This pricing strategy ensures competitiveness based on the prices of competitive products.
Sony also conducts value-based pricing to determine the suitability of specific premium prices based on the product’s actual product value and customer perceived value. Pricing strategies show the importance of high prices to ensure high margins and support premium brand images.
After the price skimming strategy’s goal has been met, Sony has started offering discounts on those products to reach customers who can afford to pay less and avoid inventory.
Above is the ultimate guide on the Price Skimming strategy. Pricing has to be done very intelligently and effectively to ensure business management looks at every aspect before making a final decision because it determines a business’s revenue. So the marketer must carefully select the price strategy and consider the business’s situation before concluding.
Understanding Price Skimming strategy will help marketers increase profits for businesses while still satisfying the needs of consumers. I hope this article brings something useful for you, enabling you to gain more knowledge about this strategy and apply it effectively.
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