How Price Skimming Works: Pros and Cons of this Pricing Strategy (2024)

What is price skimming?

Price skimming is a pricing strategy where a company sets a high initial price for a product and then gradually lowers it over time. This approach is often used when a new product is launched, allowing the company to capture the maximum amount of revenue from different customer segments.

How does price skimming work?

When a new product is introduced to the market, the company sets an initial high price to target early adopters and customers who are willing to pay a premium for the latest innovation. As demand from these segments decreases, the company gradually lowers the price to attract more price-sensitive customers.

Advantages of price skimming

Increased revenue

Price skimming allows a company to maximize revenue by targeting different customer segments willing to pay higher prices initially.

Enhanced brand image

A high initial price can create a perception of quality and exclusivity, which can enhance the brand image and attract early adopters.

Ability to target different customer segments

By gradually lowering the price, companies can target different customer segments who may have been initially deterred by the high price.

Attractive to early adopters

Early adopters are typically willing to pay a premium for new products, making price skimming an attractive strategy to capture their willingness to pay a higher price.

Disadvantages of price skimming

Alienates customers

The high initial price can alienate potential customers who are price-sensitive and may be willing to wait for the price to drop.

Attracts competition

Competitors may see the high initial price as an opportunity to enter the market with a lower-priced alternative, potentially reducing the effectiveness of price skimming.

Hurts customer loyalty

Customers who purchase the product at the high initial price may feel cheated when the price is lowered, potentially leading to a loss of customer loyalty.

Has limited effectiveness

Price skimming may not be effective in markets with strong competition or where there are no significant differences between the new product and existing alternatives.

When should you use price skimming?

Price skimming is best used when a company has a new, innovative product with features that differentiate it from existing alternatives. It is also effective when there is significant demand from early adopters who are willing to pay a premium for the latest innovation.

Price skimming FAQ

What is the difference between price skimming and price penetrating?

Price skimming involves initially setting a high price and then lowering it over time, while price penetrating involves setting a low initial price to gain market share and then potentially raising it later.

Is price skimming legal?

Price skimming is generally legal as long as it does not violate antitrust or competition laws. Companies should ensure that their pricing strategy complies with relevant regulations.

What are common examples of price skimming?

Examples of price skimming include the introduction of new technology products such as smartphones, gaming consoles, and other electronic devices where companies initially set high prices to capture early adopters.

Is price skimming better for certain industries?

Price skimming is particularly effective in industries with high demand for new, innovative products and where early adopters are willing to pay a premium for the latest technology or features.

By using price skimming, companies can maximize revenue, target different customer segments, and create a perception of exclusivity and quality. However, it is important to consider the potential drawbacks, such as alienating customers, attracting competition, and potentially hurting customer loyalty. When considering price skimming as a pricing strategy, it is important to carefully evaluate the specific market conditions and the unique characteristics of the product being introduced.