In this article we will take a look into price skimming, what it is and why it’s so important when it comes to marketing and selling products.
Many businesses and companies use careful pricing strategies in order to cope with high demand and low supply of products. As a company gets ready to roll out a new product or services, it’s extremely important to have the correct pricing strategy in place in order to successfully launch and sell a product. This brings us into the topic of price skimming.
Price skimming is a pricing strategy for products and services in which a company will charge the highest initial price possible that customers will pay and slowly lower it over time. Once the initial demand for the product or service is taken care of and other products enter the marketplace, the company will slowly lower the price.
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Lowering the price allows the company to make the product available to attract other more price-conscious segments of the marketplace. Price skimming allows companies to experience temporarily higher profit margins while demand is high.
Price skimming is used when a company decides to introduce a new product into the market. The main goal is to generate as much sales as possible when the initial consumer demand is high and no other competitors or products have entered the market.
Once the initial period of high demand begins to drop, companies tend to lower the product price down in order to continue selling the product to other consumers in the market who are more price-sensitive.
Pro Tip: During the price skimming period, profit margins are temporarily higher for companies because they are charging a much higher price.
Price skimming is often used by companies in order to recover some of their research, product development and initial advertising costs. It is often most useful in some of the scenarios below.
When a company decides to release a brand new product into the marketplace, the initial price has a serious impact on the buyers perception. As such, price skimming is used as a way to showcase status and high-perceived value for the product.
The obvious limitation of price skimming is the fact that it’s used for a temporary period of time and doesn’t act as a good long term solution to generate consistent product sales. Another limitation is that once other competitors enter the market, you have to lower your price in order to stay competitive and continue to capture sales.
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In order for price skimming to be done successfully you have to have great market time, not only for your product but also for the duration of it’s high price. If you drop the price too quickly, it can deter people from actually buying since the high perceived value can drop.
The advantages of using price skimming during a new product launch is the fact that you will experience higher profit margins for a temporary period of time. This is good in order to help you recoup your initial research and development costs that went into the product or service.
Another advantage of price skimming is the high perceived value of the product or service. High prices tend to get people talking and can be a big conversation piece when a new product or service is released. The high price also functions as a status symbol and people take note of how others are spending their money.
Price skimming also allows companies to keep up with demand. If demand is extremely high for a product the company can place the price even higher in order to comfortably meet the growing demand. It can help serve as a good way to balance demand if the supply of the product is low.
An example of price skimming is most often seen when new electronic products enter the market. These include:
The list goes on and on. Probably the most obvious example of price skimming is with new iPhone models. The prices of new iPhones have gone up exponentially with every new release. Below is a graph showcasing how the iPhone’s price has developed over the last ten years.
After new iPhones models are released, a few months later you will notice that either a competitor will release a new product or that particular model price has dropped by at least 10%.