Price skimming is popular among first-movers that have little or no market competition. While it may not be the best as a long-term strategy, price skimming can be an excellent way to maximise your profits when launching.
But what is a price skimming strategy? Read on to learn everything you need to learn about this method, including:
- So, what is price skimming?
- What is good about a price skimming strategy?
- What are the downsides to price skimming?
- How can I make price skimming work for me?
So, what is price skimming?
A price skimming strategy involves setting a higher-than-usual price when launching a product and lowering it over time.
Price skimming is most effective for new, innovative products, often related to technology. The product becomes less groundbreaking as time passes, meaning the price steadily declines.
What is good about a price skimming strategy?
Now that you know what price skimming is, let’s look at some reasons it could be a good method for you.
- It can maximise early revenue – employing price skimming allows you to recoup investments early by selling as many products as possible for the highest price point.
- It can help create buzz – price skimming works well with a slow rollout strategy. As the price drops, the anticipation to get access to the product for a lower price often rises among customers.
- You can adjust over time – one of the best things about price skimming is that you can change the price as the market shifts. Being able to drop your prices as the demand changes puts you in control of your pricing.
- It can help your brand – price skimming is a relatively uncommon approach, so employing it can help your brand stand out as exclusive. Customers might view your product as revolutionary and prestigious, meaning they’ll happily pay a higher price for it.
What are the downsides to price skimming?
Like everything else, there are two sides to this coin, meaning price skimming also comes with some drawbacks.
- You can frustrate early buyers – the customers who paid for your product at the higher price might be disappointed or angry when they see the price drop by 20% overnight.
- Might backfire when it’s expected – many people tend to wait to buy a new product because they know the price will drop when the buzz settles. As a result, you might struggle to sell your product at the highest price.
- It could help your competition – if a rival business sees how much money they can make on a product, they may sweep in with a similar product at a lower price. The result is your customers flocking to your competitor instead.
- It could damage your brand – while price skimming offers a ton of perks, it could also damage your brand. Why? Because you can come across as greedy, dishonest or even manipulative to your customers, driving them away to competitors instead.
Is price skimming the right strategy for my business?
We’ve done the legwork for you and gathered information about when this works best versus when it doesn’t. Let’s start with the businesses that will benefit most from using price skimming.
When it works well
New and revolutionary technologies (from DVD players to smartphones) are almost expected to roll out with a price skimming strategy. People tend to be excited to try new innovations, and many are happy to pay more for it.
So, if you believe you invented something groundbreaking within your niche, you could make an excellent profit using price skimming.
Clothing and fashion
If you sell clothes, shoes, bags or anything fashion-related, it would make sense to use a price skimming strategy to boost your sales revenue.
Fashion companies do this all the time, selling new products for a higher price, then moving them to the sales rack when they launch the new line.
Price skimming is the ideal model for continuously adjusting prices until you’ve sold all your inventory –– with each item sold at the highest possible price.
Although, price skimming doesn’t work for every business type. Here are some examples.
When it doesn’t make sense
If your job is to offer medical, legal, contracting, consulting or other professional services, price skimming is not the best option for you. That’s because demand for these services tends to stay the same over time.
It’s not often you hear about a new and shiny consultant service that people flock to buy, is it?
It also doesn’t make much sense to lower your prices for these services as you advance in your career. So, you’d be better off using a project-based or hourly pricing model.
Most B2B SaaS (business-to-business software-as-a-service) generally want to expand their user base quickly to increase their profits.
If you offer these services, trying to sell them for high prices at the start will likely restrict your growth potential –– the opposite effect to what you want.
Instead, you’ll benefit from employing the opposite approach (called penetration pricing), where you offer your services for lower prices than others. You could even offer a free trial to draw in users.
As your business grows, you can look at increasing your prices instead. Though be mindful about how you do this. You can read our guide called how to notify your customers of a price increase to learn more.
How can I make price skimming work for me?
Ultimately, how price skimming will work for you depends on your business’ unique circumstances.
But in general, price skimming is better suited for companies that have enough customers willing to pay a high price for their product. You can carry out market research to see if your business does.
To learn more, check out primary market research methods for startups and secondary market research methods for startups.
Additionally, for price skimming to work for you, it’s important to ensure lowering your prices won’t significantly affect costs. You still need to bring in enough money to keep producing your products.
On top of that, if you make the decrease too drastic, customers might wonder why and hesitate to buy the product.
Since this pricing strategy takes a lot of budgeting and planning, it’s essential to keep up with your finances. This is much easier with a tool like Countingup.
Countingup is the business current account and accounting software in one app. It allows you to easily track your income and expenses and view useful business insights to help you monitor your financial performance.