Skimming price is one of the crucial pricing strategies that any business can initiate to increase its profits by setting a high price and gradually lowering the price.
A thoughtfully constructed pricing strategy is essential for every business. It can help companies to strike a balance between sales and profits.
The skimming price strategy begins with setting a higher price for your product that some customers find acceptable.
Then, the price of the product or service starts gradually decreasing over time to increase sales.
A skimming pricing strategy also known as cream skimming, means you can generate more consumers as you start decreasing the price of your product and service.
So, if you want to learn about price skimming, and how it works, stay with me till the end of the article!
Let’s find out!
What is Price Skimming
A price skimming strategy involves setting a higher price for a product or service initially when it first enters the market. The price drops as the product evolves.
Price skimming is used with high-tech products. When any business discovers a new technology and launches it, initially they set a higher price rate for the new product.
Since there is little competition to match the latest technology, the business can charge a higher rate for the product’s exclusivity.
After that, when other competitors become capable of reproducing the same technology, then the company starts decreasing the price rate.
The idea behind the price skimming strategy is that the early adopters will agree to pay a premium to be the first user of the newly launched product.
This increasing price rate helps the inventor company to cover the cost of their innovation.
Further, they can set a wider market for their newly launched product through word-of-mouth marketing.
Once the product has been in the market for some time, the company should reduce the cost of the product to reflect its value. This strategy targets the early adopters and not the mass market.
How Price Skimming Works
Effective price skimming strategy sometimes takes the priority of high consumer interest during the initial stage.
If a business charges a premium for a newly launched product, it can increase the profit margin on all units sold upon initial release.
Consumers known as early adopters will agree to pay steeper prices for a cutting-edge product.
Whether the newly launched product accurately reflects the value or not, early adopters will pay for the product.
As time progresses, the company purposefully lowers the price of the product. This is a gradual price drop and allows the product to be more accessible to a wider range of people.
Then, the step-by-step reduction of the product price makes it accessible to a wider range of consumers.
This strategy may attract the individuals who initially hesitated because of the higher cost. Thus, the company can expand the overall market.
Advantages Of Skimming Price
1. High Return on Investment
Initially, setting the highest price for a newly launched product helps the business to recoup the cost of research, innovation, and development.
Selling your products at a higher rate to the early adopters helps the company to increase the profit margin while demand is also high.
Some early adopters will pay the premium to be the first user of the new product. They will not wait for the product’s reviews, so you can charge more to those buyers.
2. Reaching Different Consumer Segments
When a business launches a product with a price-skimming strategy, different groups of shoppers become interested in purchasing the product.
However, they can not afford the high price rate, so they can not purchase the product at the beginning stage.
But when the company drops the price of the product, it attracts the interest of consumers of that segment. So, thus you can establish a steady stream of sales.
3. Building the Brand Image
At the initial stage, the higher price of a newly launched product helps the business to build a brand image.
The price appeals to the segments of consumers to whom status is very important. You can earn a good reputation for the premium product.
4. Enhancing The User Experience
Although setting a price-skimming strategy is effective for a newly launched product, it is also important to consider the experience of the early adopters.
Apart from completing internal testing of the product and solving issues as early as possible before launching, you must consider users’ experience.
It will impact future marketing and product development decisions. If you can provide high-quality customer service to the early adopters, it will help your business to generate consumer feedback.
Disadvantages of Skimming Price
1. Reducing Sales
Implementing a price-skimming strategy can decrease the total number of units sold.
The initial high price may slow down the decision-making process of the potential buyers.
So, it may provide a better opportunity for your competitors.
2. Negative Customer Reaction To Price Changes
After the initial product launch, if the price drops too much and very quickly, some consumers may feel that they have overpaid for the same product.
The rapid price drop can help boost demand but at the same time, some customers may become dissatisfied with your brand.
So, this reaction may lead to a decrease in sales of new products. So, you may lose customer loyalty.
3. Impacts Profits With Waning Demand
If you launch a product with high demand, but the interest level of the consumers lowers as the product ages, this skimming price strategy may affect the overall profitability of the product run.
4. It is not a good Strategy In a Crowded Market
In any industry, it is important to assess customer evaluations and analyze the competition in the market for your new product.
If you already have various competitors, there is little chance your product launch can turn the consumers in the other direction.
Price skimming is not a good strategy for an already busy market. Unless your product has amazing new features, no one will be interested in purchasing it.
Conclusion
Price skimming is a strategy where a business starts selling a new product at a higher price. After that, the company gradually lower the rate over time. This strategy is helpful to attract early buyers and those interested in paying a higher rate for the latest thing.
Skimming price comes with a lot of advantages as well as disadvantages. Here, I have provided every detail of price skimming.
You can go through this guide and learn from it. Then you must think does this strategy make sense for your business? While thinking about what is the answer, consider a few facts such as your target audience, your innovation, and the competition in the marketplace.
