What do you think about lowering prices instead of increasing them? This is what price skimming is all about. Companies that create innovative products, in most cases, initially set high prices for them when they are introduced to the market for the first time, and then, as their products become outdated or replaced, gradually lower them. This approach is typical in the electronics world, especially when new smartphones replace the old models. This practice is called price skimming, and in the article, we will take a closer look at what it exactly is. We will also analyze its pros and cons.
Price skimming definition
Price skimming is one of the most popular pricing strategies (along with the penetration strategy) that companies use when they are introducing a new product to the market. In particular, it is very popular with producers of breakthrough and innovative products. This type of action aims at achieving maximum profit without generating top sales shortly after the product is launched on the market. At this stage, wealthy customers who want to acquire a new product as soon as possible usually make the purchase. These customers are sometimes referred to as early adopters. Over time, the product’s price is gradually lowered to reach more price-sensitive customers.
Price skimming – why is it worth your attention?
An essential advantage of this strategy is that it is easier to lower prices than to raise them. Especially when the demand is falling, or the competition threatens you. Besides, price skimming has several other advantages.
1. High price as an indicator of prestige and quality
Higher prices at the beginning of the product life cycle enable you to build a prestigious brand image that attracts status-conscious consumers. Price skimming allows you to convince consumers that the product is of high quality and belongs to their must-have category.
2. Quick cost recovery
Price skimming allows companies to recover their product development cost quickly. High profit over a short period is only slightly affected by discounts. Moreover, making a profit from the very beginning allows you to reduce the risk of rapid aging of the product.
3. Market gradation and segmentation
The use of price skimming enables price gradation over time and is an effective way to segment the market. A high price will encourage the purchase among early adopters, while its subsequent reduction will attract consumers more sensitive to the product’s price. Such an action allows achieving the highest possible profits from various types of customers in the long run.
Does price skimming have any disadvantages?
Price skimming, like any other pricing strategy, also has its drawbacks. First of all, it’s essential to take appropriate marketing actions to prove that the product is worth the price. If a company cannot explain why the initial cost is so high, consumers may not want to buy it.
Also, producers who decide to use skimming pricing must consciously plan the long-term price reduction strategy to avoid discouraging consumers. If the product is worth 2,000 USD at the launch time and its value drops by 70% after just several months, the first buyers may feel cheated. This is exactly what Apple did. This ill-conceived strategy triggered a massive dissatisfaction among customers. As a result, Apple was forced to offer coupons for the first buyers to use as compensation.
Inadequate management of the price reduction strategy may also cause consumers aware of the company’s activities to wait several months before purchasing a product and pay a much lower price for it.
The companies that take advantage of price skimming strategy and cooperate with several distributors need to make sure the prices their products are offered at in the market are aligned with their pricing strategy. That’s why every brand should track prices at which its clients offer the products in the market to be aware of any SRP deviations that could influence its reputation.
Real-world examples of price skimming
Price skimming can be the basis for the development or decline of a business. The price of the product always indirectly reflects the goal pursued by the company. However, several well-known brands have mastered their price reduction strategy to perfection.
APPLE & OTHER SMARTPHONE PRODUCERS
From the very beginning, Apple has been using price skimming in the range of iPhones they offer. Every year, when a new smartphone model is released, the original price is much higher than that of the competition. Following the launch of a new model, the previous model’s value declines as it is no longer considered a novelty. You can read more about Apple in our case study: How does Apple use being a luxury brand? – Case study of a skimming strategy.
And if you take a look at this chart below, you will see that other manufacturers use the same approach. As it turns out, it is common that the smartphone’s price just eight months after the release is even 25% lower than the initial price.
Sony uses the same approach with their PlayStation consoles. For example, the PS4 (released November 2013) initial price was at 399 USD. In October 2015, the price was lowered to 349 USD. Today, we are shortly after the PS5 release. The initial price is, depending on a version, the same or higher. PS5 Digital Edition costs 399.99 USD, and standard PS5 costs 499.99 USD. We can expect that shortly these prices will go down as well.
Image source: https://blog.playstation.com/tachyon/2020/09/50349535038_42fa72f759_k.jpg?resize=1088,612&crop_strategy=smart&zoom=1
How does price skimming work in e-commerce?
After analyzing the advantages and disadvantages, we can see that price skimming is a method of pricing an innovative, new product that is noteworthy as long as the manufacturer is careful about the pitfalls. If the brand is not aware of its product prices in the market, it can struggle to assure a consistent price positioning of the entire brand. Even if it promotes the price skimming strategy, some retailers can decrease the price too early to gain a higher market share or laggard in decreasing the prices.
The solution to this problem is monitoring prices and deviations from the suggested price, which you can effectively start today with the Dealavo platform. Our tool allows brands to monitor their products’ prices in various channels and then react in the event of possible deviations.
If you run an online shop and are interested in price monitoring or dynamic pricing supported by intelligent algorithms – feel free to contact us as well. We will be happy to talk to you and choose the right solution together.
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