Capitalise on Your Product with Price Skimming

Price skimming involves setting a high initial price for an innovative product, gradually reducing it to meet market demands. It enhances brand perception, aids cost recovery, but may dissatisfy early adopters. Examples from Apple and Tesla showcase its success in targeting early buyers for premium offerings. Recommended courses offer insights for effective implementation.

Are you aware of early adopters? 

This customer segment is among the first to purchase a product newly available to the market. Price is not an issue because they have a high level of technological literacy or are looking for the next big innovation to own before others.

How do innovative tech companies maximise profit margins from this market segment?

They use price skimming when the competition is too low initially and then reduce as and when there is market saturation. 

What is Price Skimming?

Price skimming is one of the most common pricing strategies businesses use by setting a high initial price for an innovative product or service and gradually reducing it. 

Also known as skim pricing, it helps in maximising ROI quickly, as customers are willing to pay for it. Over time, the demand from the early adopters starts reducing. Then the company reduces the price to meet the demands of the price-sensitive customer segment. 

This is how price skimming works. 

Advantages of Price Skimming

Improves Brand Perception 

Price skimming creates a positive brand image in several ways. First, it creates an impression of exclusivity. Customers associate a high price with cutting-edge technology or superior features. They feel privileged to own the product before others. 

Second, early adopters become brand advocates. And they can help in raising the status of the brand. 

The brand can stand out in the market because the product or service seems better than its competitors. Also, a brand constantly developing superior products can build brand equity over time. 

Facilitates Cost Recovery

Setting a high price at the beginning of product commercialisation can help a business achieve high-profit margins. Enthusiasts are willing to pay a premium price for early access, and this is how the company can recoup product research and development costs quickly. 

Competitive Advantage

A high price can deter competitors from entering the market. A brand that sets a high price is a potential threat to other upcoming businesses in the same industry. These businesses will find it challenging to introduce better innovative features. Due to that, the brand can maintain a high-profit margin for a long time, leading to greater market share. 

Disadvantages of Price Skimming

Only Responds to Inelastic Demand Curve

The term inelastic demand can be defined as a situation when there is hardly any effect on the quantity demanded due to fluctuations in the price. Price skimming only works in this scenario. 

If the demand curve is elastic, a slight price change or hike can significantly impact the demand for the product. 

Can Create Dissatisfaction Among Early Adopters

Some early adopters may dislike the brand when the price gradually reduces. This is because of the perceived devaluation of the product, creating a missed sense of opportunity. 

This resentment, however, can be mitigated by creating loyalty programmes. 

Most Popular Examples of Price Skimming

Apple

When Apple releases a new iPhone model, it often adopts a price-skimming approach. 

The initial launch price for the latest iPhone is a premium. It targets early adopters who willingly embrace new technologies and pay a higher price for the latest features. 

Apple's high pricing strategy contributes to its brand image of exclusivity and innovation. The high price is associated with cutting-edge technology. Which also positions Apple as a market leader and innovator, often setting a benchmark in the smartphone industry.

In short, this premium pricing strategy allows Apple to generate substantial revenue and achieve high-profit margins in the early stages of the product’s release.

Tesla

Tesla has a price skimming approach. The initial price points for its vehicles, such as the Model S, Model X, and Model 3, are set at a premium to target early adopters who are passionate about electric vehicles. They are willing to pay a higher price for high-quality technology and environmental sustainability.

Tesla not only maximises early profits but also establishes itself as a premium brand in the electric vehicle market. This can deter competitors and maintain a high-profit margin for a longer period.

Learning to Apply Price Skimming

By now, you must know the basics of price skimming as a strategy with unique advantages and disadvantages. Applying it to your product is a different story altogether. 

You need to learn it to be able to increase sales for your product and be able to maintain high-profit margins. 

Do check out these courses. 

• Customer Value in Pricing Strategy on Coursera
• Pricing and Sales Management from IIM Calcutta