Price skimming is a marketing strategy where a new product is introduced at a high price and then gradually lowered over time as demand and competition increase.
It is a clever approach businesses use to lure customers willing to pay higher prices for a new or improved product. Once this objective is accomplished, the business modifies the prices per the market demand, thus making it accessible to a broader customer base.
What Is the Principle of Price Skimming?
The term itself denotes the basic logic of the strategy, which is attempting to “skim” off the cream segment of the market to which your product appeals. Price skimming is best done when the product is new and fresh to maximize profit margins from the very outset. Moreover, the strategy targets the early adopters rather than the mass market.
There are several reasons why companies adopt price skimming. They use the strategy to:
- Quickly regain their fixed expenses.
- Recover money spent on R&D.
- Reduce the time taken to regain initial expenditures.
How Does Price Skimming Benefit Organizations?
1. Quicker and higher ROI
When launching an innovative product, especially in high-tech industries, charging the highest initial price can help your company recover costs related to research and development along with promotional expenses.
2. Better market share
Although price skimming initially gives only a small market share in the early stages, it gradually expands your customer base and gives you a bigger market share as the prices gradually decrease.
3. Easy market segmentation
By segmenting customers based on their willingness to pay, you can target high-paying customers for advertising and sales.
4. Test new services
Charging higher prices upfront can help you find a balance between testing your services with real users. You can also avoid being overwhelmed before your minimum viable product becomes a robust platform.
5. Pricing adjustability
Setting a higher price at the very beginning allows you to evaluate the buyer’s mindset and sell your inventory to maximize your profit. From there on, you can
decide on when and how much to lower the price.
6. Brand imaging
When making purchases, people usually don't skim. However, if done well, skimming can influence how the market perceives your brand.
What Are the Challenges With Price Skimming?
- It may not work well in a crowded market with too many competitors because even the cream customer segment will look for more cost-effective options.
- If new customers pay less, it may upset your cream customer segment who signed up for higher prices.
- Overuse can undermine the intended pricing strategy because the potential buyers have to wait for a price decrease. This can negatively impact your revenue and rollout strategy.
- It is not ideal for long-term implementation since it can only boost initial profit margins.
When to Use & When Not To Use A Price Skimming Strategy
Price skimming can give you the desired results if it fulfills the following criteria:
- Market adaptability to modify prices to stay competitive.
- Justification of the high price with the product value, quality, and exclusivity.
- Well-established product and brand presence in the market.
It is best to refrain from price skimming if:
- Your product has immediate competition.
- Your product lacks the exclusivity to appeal to the customer segment willing to pay.
- If your product is not unique enough to generate a word-of-the-mouth reaction.
How Does Price Skimming Work in SaaS?
For SaaS companies, price skimming can be very effective when the market conditions are favorable, especially for SaaS businesses targetting high–end customers and offering enterprise-grade deals.
One of the best examples of price skimming in SaaS is Salesforce, a company that took the entire SaaS industry by storm with its pricing strategy.
Salesforce was the first company to offer its CRM through the cloud, making it accessible anytime. This innovative approach made Salesforce an example of a company that used advanced technology to justify premium prices.
Conclusion Points
It is best to proceed cautiously if you plan on implementing price skimming. Done well, it helps you gain quicker ROI and good image branding.
However, even a little carelessness can have significant adverse effects and a delayed recovery process. Hence, always conduct thorough research to determine the viability of price skimming for your product.
