If you’ve ever had your eye on a new smartphone, you’ve been faced with a choice: make your purchase as soon as it releases at the highest price, or wait a few months for the price to come down.
While it was the same phone either way, your decision probably depended on what was more important to you. Did you want to be on the bleeding edge of new consumer technology? If so, you likely bought the product immediately. Or could you bear to be a little less trendy, but save money in the process? Then you probably waited a while.
No matter what the product is, there are always consumers who buy at the release and those who wait for the price to drop. To capture all of this demand and sell their products to more consumers, brands use a pricing strategy known as price skimming.
Where premium pricing caters to those who want the best products and economy pricing caters to those who want the best deals, price skimming splits the difference by selling at multiple price points over time.
In this post, we’ll explain price skimming in detail, examine the pros and cons, and ultimately help you decide when and how it can be beneficial to your brand.
What is a price skimming strategy?
A price skimming strategy is the tactic of releasing a product at an initially high price and then gradually lowering the price to reach into different market segments. Also referred to as a skimming pricing strategy, it is the opposite of penetration pricing, which is when a new offering is released with an initially low price to be eventually raised.
Because price skimming initially targets the premium market segment in competition with other higher-priced products, it is considered to be a type of premium pricing strategy, which itself is a type of competitive pricing strategy.
Pros of price skimming
Using a price skimming strategy gives you the chance to obtain high early profit margins, gain premium associations, and reach into multiple market segments.
High initial margins
Price skimming initially targets early adopters who are willing to pay a higher price to get your product sooner. Those early sales will provide you with hefty profit margins—much higher than the margins you would’ve seen if you’d launched with a lower price you planned to maintain. Sales at this price won’t last, and you’ll have to lower it once you’ve exhausted your early adopter market, but you get to take advantage of those high margins while you can.
Premium associations
Releasing a product at a high initial price has the psychological effect of giving it premium associations in the minds of many consumers. Not only is the product new and flashy, but it’s priced just out of reach of certain segments, making it feel exclusive and desirable. Think about the latest flagship smartphones, the newest luxury cars, and the most recent gaming consoles. These are the types of premium products that tend to do well using a price skimming strategy. By pricing your product similarly, you place it up in the same tier.
Increased reach
The major advantage price skimming has over other forms of premium pricing is that it lets you reach into multiple market segments. Rather than sticking with the premium segment indefinitely, you can keep prices high just long enough to get as much value out of that segment as possible, and then move prices down to the next segment. A little while later, you may lower prices even more, perhaps sweetening the deal with seasonal discounts and/or bundles. Then right about the time your product reaches its lowest price point, you release a newer iteration and start the process over again.
Cons of price skimming
The drawbacks of price skimming are that you need to be able to justify your prices, you risk alienating early adopters if your products don’t live up to expectations, and your products need to have an inelastic demand curve.
Must justify initial price
Like any form of premium pricing, price skimming will only work if you can convince enough consumers to buy your products at the prices you set. So you’ll need to have an offering that provides enough value to justify its price. You can accomplish this by combining brand loyalty, new and exciting features, and a history of offering quality products. And be sure to highlight what sets your product apart from the competition.
Risks alienating early adopters
Early adopters want to be among the first people to try out the newest and best products, and they’re willing to pay more for the privilege. However, they’re counting on having a good experience with your product. If your offerings fail to live up to expectations, then early adopters will become more wary about paying those initial prices. The higher your prices—and the sooner you decrease the price—the less forgiving your customers will be. Release too many flops, or drop the price too soon after release, and price skimming may no longer be a viable option.
Needs an inelastic demand curve
A price skimming strategy really only works for products that have an inelastic demand curve. The demand curve is considered inelastic when demand for a product is so high that changes in price don’t affect it. And that can be a difficult bar to clear, especially for smaller brands with little awareness. That’s not to say it’s impossible, but price skimming usually works best for established brands with an existing loyal customer base.
Monitor your prices with Prowl
When using a price skimming strategy, it’s important for your products to have consistent prices wherever they appear. If sellers are able to list your products for too little, it can negatively affect customer perception and throw off your whole strategy. So it’s important to have and enforce a MAP policy to make sure sellers and retailers stick to the prices you prescribe.
Prowl is the most advanced MAP monitoring software available. It crawls every site your SKUs appear on, comparing prices to your pricing policies. When it detects a pricing policy violation, it takes a screenshot of the violation and notifies you. You can also build and customize templated MAP violation messages to streamline MAP enforcement.
Since Prowl crawls everywhere your products appear, it can track both authorized and unauthorized sellers, helping you find new sellers you’d like to partner with or those you need to eliminate.
MAP enforcement is impossible without price monitoring. And price monitoring is impossible at scale without tools like Prowl.
Want to see how Prowl can help protect your revenue?
