Download our free sales pricing calculator to see how much revenue you’ll drive. Compare the numbers to eight other pricing models, including penetration, value-based, and premium pricing, to choose the best one for your business. Companies can widen their profit margins early upon launching a new product and selling at higher prices. what is skimming pricing Price skimming can help businesses recoup their research and development costs by selling innovative products at the highest price the market will accept.
The market for premium price goods, for example, makes these products less resistant to any economic shifts. Customers of premium brands have less price sensitivity and want to be among the first to get their hands on a new, innovative product. They generate enthusiasm and become a source of recurring revenue as they spread the word about the product.
- Wondering if a price skimming strategy is the right choice for your business?
- For example, if a new smartphone lacks innovative features to justify its high price, early adopters may voice their dissatisfaction, impacting future sales.
- However, timing is critical; for example, delaying price cuts can drive customers to competitors.
- Before joining the Vendavo team, Dan was a customer at a large, international B2B distributor.
What is Price Skimming? Definition, Examples & How It Works
Once the initial excitement subsides and sales from early adopters begin to level off, the company lowers the price to appeal to more price-sensitive consumers. This second wave of customers includes those interested in the product but deterred by its initial high price. For instance, a few months after the iPhone’s release, Apple typically reduced the cost, making it more accessible to a broader audience.
Won’t Work in the Overcrowded Market
If competitors already offer a similar product, it will be harder to convince customers to pay a premium for yours. For price skimming to work, it’s essential that there’s some type of white space you’re filling in the market. If there are few competitive products, make sure it’s crystal clear why your innovation goes above and beyond what’s currently available.
When Should You Use A Price-Skimming Strategy?
When new designs are released, they’re usually priced at their highest point. However, as newer items make their way onto the racks, the supply of the now older design dwindles; these items often move to the clearance section and are continuously marked down until they are sold. Price skimming allows you to charge a higher price for an exclusive new product upfront, slowly lowering the price to make it available to a wider audience. Get in touch with our friendly team today to discover how we can supercharge your pricing strategy and bottom line.
The key to the strategy is to price the product right at launch and then time the price reduction appropriately. Like tech companies, consumer electronics manufacturers may use price skimming for new products like smartphones, smart home devices. Again, those early adopters and tech enthusiasts may be willing to pay more to be among the first purchasers of the latest and most innovative models. As the price drops, you’ll continue to appeal to more and more price-sensitive customers.
When it’s all said and done, price skimming should be considered another arrow in the quiver of the savvy pricing practitioner. Application varies depending on industry, product characteristics, and market dynamics, but when done well, it can lead to exceptional financial results. A price shock in B2B business hinders companies looking to generate steady revenue. The shock that this model gives is detrimental to the foundation of the company and can damage the ever-increasing growth potential. This is done when high consumer demand and competition have not yet arrived.