There are around seven pricing strategies that companies can use. These are competition-based pricing, cost-plus pricing, dynamic pricing, value-based pricing, usage-based pricing, freemium pricing, and price skimming.
Each of these strategies will have different outcomes depending on different variables like your product quality, market segments, budget, brand reputation, and so on. So, it’s vital that you make the correct decision when choosing a pricing strategy.
In this article, we’re focusing on the final pricing strategy mentioned - price skimming - and hopefully, we’ll help you decide whether this is an appropriate strategy for your company to implement.
We’re going to look at:
What is price skimming?
Price skimming is a strategy some organizations use when launching a new product. The aim is to release the product at a high price when the product doesn’t have many other competitors on the market, and gradually decrease the price over time to maintain that competitive advantage once other products are introduced.
The high price is typically the highest that part of their customer base is willing to pay and is then deliberately lowered to target more segments who can’t perhaps afford, or aren’t willing to pay, the highest price.
A similar pricing strategy is called prestige product pricing, which maintains the high price throughout the entire product life cycle. Read all about it in our article:
An example of price skimming
Apple is a great and very common example of the price skimming strategy. Whenever a new iPhone or iPad is launched, it comes at a premium price. Apple builds up demand with their early adopters via events where they reveal upcoming products, and then they leverage pre-sale to allow customers to pre-order before it even hits shelves. Customers line up overnight at Apple stores before launch day, or wake up at 5 am to purchase online.
But, one year after launch, that same iPhone or iPad comes down in price, and Apple is able to market to the early majority and late majority cohorts with a lower willingness to pay. This allows them to expand their market reach without sacrificing the upfront revenue from early adopters.
Pros of price skimming
It’s important to weigh the pros and cons of any strategy that you are considering implementing within your product marketing strategy. After all, something that may work for one brand, may not work for you. So, we’ve done the hard work for you, and have come up with the most important pros and cons for the price skimming strategy.
The benefits of using this strategy are…
• The high price implies high quality
Of course, this isn’t always the case, but a higher-priced product will often convey the impression that it is also higher in quality. This then can make your product seem more prestigious and desirable, which can then increase your customer base and overall sales.
This then ultimately…
• Can help your brand reputation
To quote Product Marketing Alliance's guide to pricing,
“Price skimming can also create an element of prestige surrounding your product or service; it creates the impression your offering is a must-have. Introducing high prices in the early stages attracts customers who are status-conscious, and provides you with a much-needed buffer when it comes to reducing the price in the future if needs be when rivals enter the market.”
• Helps to recuperate costs
Obviously, a product can cost a lot to create, develop, launch, and market. Setting your product at a higher cost - if you have an eager and willing customer base - can ultimately help you to recover or make up the costs it made to successfully bring it to market.
• Brings higher profitability
Fitting in with the previous point that it helps to make up costs needed to actually develop and launch the product, a higher initial product price can help you to generate a high profit margin for your organization.
Cons of price skimming
As there are hardly ever any pros without any cons…
• Can’t work long term
Price skimming isn’t an effective long-term strategy because eventually, you’ll have competitors entering the market with similar, rivaling products and will put what is called “pricing pressure” on your company by introducing cheaper costs, and so on.
• Can backfire if customers are expecting this
If your company is well known for using the price skimming strategy, like Apple, you’ll have many customers who’ll ultimately wait to purchase your product until the price has been reduced. If you have a significant number of people waiting for this to happen, you’ll lose out on those higher priced sales and slow down the volume of demand, which will ultimately affect your overall revenue.
• Could damage brand reputation
Some audiences negatively perceive brands who consistently use the price skimming strategy because it can come across as though you care more about profits than your customer. So, it’s important to note that this strategy can’t be used for all brands and all products, as the goal should be towards keeping the customer happy and making them feel like they’re the priority.
• Might frustrate the original buyers
Price skimming can be a point of contention for early buyers of the product.
Of course, you’re going to have some that won’t care, because they're focused on getting their hands on the product first and are willing to pay whatever the initial price tag is.
But, for others, if you buy a product and then see that a couple of months down the line, it’s significantly cheaper… you’re may feel slightly conned.
• Customers may turn to competitors if the price lowers too late
What’s more to be said? If you wait too late to lower the price of your product, this can deter your customers from your product and brand and, instead, make them turn to a competitor who has come out with a similar product at a cheaper cost.
• Requires a lot of specific market conditions to work for your brand
As we’ve previously mentioned, this pricing strategy isn’t going to work for every single brand. So, there are a lot of specific market conditions that you’ll need to consider and ensure that your brand lines up with to know whether the strategy will work for you, or not. Here are some examples:
- High-quality product and brand image: A consumer is not going to be willing to pay a high price for a product if the quality of the product doesn’t match. The same goes for if they do not recognize or appreciate your brand already. So, ensure that you have these factors already in place for the price skimming strategy to work for you.
- A big enough customer base willing to pay a high price: What’s the point in putting in a high price if the majority of your target audience is looking for bargains? This will only damage your profits and overall sales.
- No competitors on the market: Competitors must be deterred from entering the market with a similar product so it does not undercut you and your price skimming strategy.
Want to learn more?
Pricing strategy sits at the heart of your product's positioning, underpinning your competitive advantage. If you're to win and keep customers for the long term, you'll need to understand how your competitors are pricing their products and establish a pricing strategy of your own.
We wrote the Competitive Positioning Playbook to teach you how to blend CI and customer research for an unstoppable positioning strategy.
Grab your copy to learn:
🙅♀️ The three steps you must not skip in crafting competitive positioning.
🪛 A top-to-bottom tear down of the positioning process, and how CI fits in.
🏹 How to use competitive positioning to shatter your org’s revenue ceiling.
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