Innovation comes at a cost. If you are going to bring a unique product, you need to invest in R&D, think out of the box and take a risk of launching the new product. When you are doing all this, you would off course keep the price of the product high to get the benefits in return. Hence, many companies which are innovative will use the skimming price strategy.
Skimming pricing is used when a product, which is new in the market or just launched, is sold at a relatively high price because of its uniqueness, benefits to customers or its current Wow factor. However, slowly but surely when the product gets older in the market, then the price is dropped and the product is brought at competitive pricing.
Skimming price is mostly used for technological products where the product demand is not consistent. The typical product which is launched with a skimming price strategy is unique to the market, has customers who are ready to pay a premium for the product, and is far ahead from the competition. Furthermore, due to the high price, the correct positioning is obtained for the product which helps in reaching the right target audience. Remember that premium customers want to be unique and they want products which are status symbols. All these factors are achieved with the use of skimming price strategy. Thus, skimming price is a smart strategy for smart marketers. And here on we take an example of the smartest marketer ever – Apple.
Example of Skimming price strategy
When IPhone 4s was introduced in the market 4 years ago, its price was huge. Few people could actually afford an IPhone. With the passing of time, prices of the IPhone 4s have decreased gradually, such that nowadays many people can afford an iPhone. A few days ago IPhone 6 has been launched in the market. Before that Iphone 5S was launched. Both these phones sold in large quantities and at a very heavy price. In fact, after long debates and reviews regarding the quality and the increased price of the phone, people decided to wait until they will be able to buy the Iphone 6S. Presumably, the price of the current IPhone 6 will decrease drastically in the next year. The strategy that Apple is using is known as the skimming pricing strategy. And Apple is only just an example of one of the companies performing skimming pricing, but the list can go on and on, especially in the electronics industry.
As it can be understood from the Iphone example, the strategy that Apple is using consists keeping the highest initial price that the first customers will pay and as soon as the demand of the first customers is satisfied (commonly known as innovators group), the company will lower down the prices over time. But if we were to think in matter of perspective, then you wouldn’t buy an IPhone 4 now because it will be inferior to the current Iphone. This can be one big disadvantage of the skimming pricing strategy, as the companies can develop negative publicity if they lower the price too fast and without significant product changes.
The initial purchasers can feel frustrated and ripped off by the changes in prices for the same product that they have purchased at higher costs. Basically the ones that are initially targeted are the early adopters, and when product reaches into the maturity stage prices drop in order to target the more price sensitive segments. The word-of-mouth is also a useful part, as the early adopter will also play the role of spreading the news and convince relatives and friends to purchase the respective product.
However, depending on the barriers to enter the market, in the long-run, profitability will decrease as new entrants are going to approach the same market, lowering the prices. A quite good example can involve the Chinese companies which can come up in a short notice with a cheaper copy of the IPhone 6.
In other words, the skimming pricing strategy has the following main benefits:
- To create an effective segmentation, and acquire maximum profit from each segment (the first segment to be attracted will be the status conscious customers)
- Benefit from high short-term profits due to the novelty of the product
- Good return on the initial investment/set-up costs, which is done while introducing into the market a new product will involve costs in marketing, research and development, etc.
Taking into consideration this strategy, you should also pay attention to the legislation. Price discrimination by itself is illegal. By selling the same product to different segments for different prices you are considered to make price discrimination. However yield management is not illegal. Meaning that you manage to control your inventory and sell it for the right price and people, it is also what can be translated as skimming pricing.
Finally to end up with another example let’s take air seats in a plane, which is an example of reverse skimming price. When the seats of an airplane are available, they are priced at lower rates because the demands are also low. But as soon as the days go by and the date of the flight approaches, the prices go drastically up because the demand increases. Thus, this in itself is an example of the reverse skimming price strategy. In general, innovation and technological advantage is a must to get skimming price from customers.