Price skimming is a pricing strategy used by business which consists of establishing an initial high price for a product in order to lower that price over time and reach more portions of the market. This strategy is primarily used in the technology or video game sectors.
To understand the mechanics of this strategy it is vital to know the price elasticity of demand – the influence of price change on consumer demand – and the type of competitors you have. These types of strategies will work best in a market with inelastic demand. To know more about your competitors you can use monitoring tools to know the position of your e-commerce in relation to the market and the competition.
How the price skimming strategy works
Imagine that you have a business that is dedicated to technological development, and you are going to launch a new device to the market. Then, by using this strategy and observing the product’s life cycle, you will set a high initial price. You will have to evangelize the early adopters and not lower the price of the product after a short time, since it can affect your image. Pricing will increase the perception of the product’s brand and allow you to cover the initial expenses more quickly. You should decrease the price over time as your product enters the maturity and decline phase.
This strategy is recommended to use in sectors where market share is spread over a few businesses, such as game consoles, or if your product is well established in the industry, such as Apple or Samsung at smartphones market.
Advantages of price skimming
The most obvious favourable feature of this strategy is profit margins maximization, which leads to a rapid return on investment. This cost recovery will allow you to invest the benefits in improving areas of your business or implementing new features to your product.
High prices influence user perception, identifying your product as one of quality and prestige. When your competitors make their version of your product, you will have had time to accumulate profits and you will have enough margin to be able to lower prices and make your product continue to be competitive.
Product price changes allow you to segment the market, making you earn the most from each part of the market during the different phases of your item’s life cycle.
Another advantage of the skimmed pricing strategy is that early adopters will give you feedback and help you improve your product, making it more profitable in future versions.
Cons of price skimming
Unlike the penetration strategy, using price skimming in a market that is highly saturated with competitors is disadvantageous, as consumers will have no problem buying a product or service similar to the one you can offer but at reduced prices.
This price strategy will be useless in a market with low elasticity as the price sensitivity of users will be very high, so they will be reluctant to buy products at high prices.
Another disadvantage of skimming prices is low efficiency in the long run, as competitors will eventually enter the market and you will lose your competitive advantage.
If you cannot justify setting those high prices, potential customers will not buy your product. Using this strategy too much can trigger a loss of consumer loyalty, as they will wait for you to lower prices before buying the product.
In short, before using this or any other strategy it is inevitable to do a study of the market where you want to operate and your competitors. Doing it manually is an inefficient way that will cost you time and money that you could invest in improving the prices of your products. To carry out a study in an automated and periodically updated way, you can use tools to monitor prices and products.