Pricing your product is a very crucial part of the decision making of business after the manufacturing. Entrepreneurs and business owners have different types of pricing strategies to choose from while keeping in mind the overall objectives of the business.
Today we will discuss price skimming strategy and how it’s important.
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What is Skimming Pricing?
Price skimming is the strategy where marketers charge higher price of its product and service in the beginning, and then reduce it over time.
The purpose of charging more is because of many reasons; like covering the initial research and development cost, and to check the demand whether customers would pay for it or not.
Once the company sees the opportunity of demand and growth in the market, then it starts producing it at a mass scale, and that would lower the price of the product or service. As a result, the business also attracts many price-conscious consumers.
The word skimming came from the consecutive layers of cream, addition, and melting of cream tells us that the firm reduces the price the same way.
How Pricing Skimming Works
The phenomenon of price skimming occurs whenever a new scarce product enters the market, competition is low and demand for the product is high, and the business accumulates as much profit as it could to take advantage of the situation.
There are many price-conscious consumers in the market; the company lowers the price of its product or service to make it readily affordable to them. Once the price of the product is lower, then it would become very difficult for the potential newcomers to enter the market. When the new firm enters the market and the already existing business would crash the market by lowering the price of its products.
On the other hand, price penetration is the strategy where marketers lower the price of its products and service, with the plan of grabbing a great market share. It usually happens in the category of common low-priced items; like ordinary household products. It’s because such items are everybody’s needs, and everyone expects a lower price.
Companies and businesses use price skimming strategies in the following circumstances like;
- Customers would perceive that high prices mean better quality.
- People have a thirst for the new product and they would be willing to pay more for the product.
- When the firm lowers the prices, then it would attract new users and sale increases as a result. Economies of scale would also lower per-unit cost.
- When the price is high, then new firms would be reluctant to enter the market. It’s because they know that the price would fall at any time, and their investment would go along with it.
Limits of Price Skimming Strategy
If the firm maintains high prices of its products and services for a long time, the customers won’t want the company to lower its prices. The majority of the consumers would revert to the cheap producers, and it would be a great loss of market share.
Therefore, a business should avoid price skimming strategy as soon as meeting its targets and covering its initial research and development cost.
If a firm uses price skimming strategy of its products that already exist in the market, then it won’t work. It’s because customers would expect more features at the same price, they would ask what is it for them to replace the product.
Advantages of Price Skimming
Some of the advantages of price skimming are as follows;
Tech companies like Apple, Google, Samsung, and Huawei employ hundreds of employees in their research and development programs. They spent billions of dollars annually in their search for launching innovative products and services.
Therefore, when such companies launch a new product and they charge a high price for it, then it’s justifiable that they have invested a lot. If your business has spent a lot of resources, producing something innovative and creative, and it would be justifiable to charge higher, in the end, to cover up the initial cost.
Stand out Your Brand
It’s a general perception that good brand means high price, and better quality product also equals high price. However, when you follow the price skimming strategy, then tags like prestigious brands and better quality are associated with your brand.
Some status-oriented customers prefer and willing to pay a higher price for the product and service. The company generates profit to finance its upcoming projects. When the firm reaches its target, then it lowers the prices and makes the product available for the mass audience. The sale increases and the company achieves the maximum market share.
As we know that marketers divide the consumer market into different segments, price-conscious and quality conscious customers are among those categories. The firm targets a different segment of the market in the different stages of a product’s life cycle.
In the beginning, when the company uses the skimming strategy, then it targets the quality conscious and brand prestige customers; these people don’t much care about the price. The scarcity of the product and status matters to them more.
A price-conscious segment of the market belongs to the middle and lower-middle-class of the people, their income is limited and they prefer a cheaper product and have better function. In the second stage of skimming the product’s life cycle, the company targets this segment of the market.
Experiment New Ideas
When the company introduces a new product in the market, the product is actually in the experiment stage of its life cycle. Its early users are guinea pigs of the new product; the company makes changes based on their feedback. Once the product passes all the tests, then the company launches it at a mass scale. These early users also do the word of mouth marketing for the company.
Disadvantages of Price Skimming
Price skimming strategy isn’t with disadvantages, here they are;
Applicable on if Demand is Inelastic
Not every tech company is big like Apple and Google; many companies are struggling to make their space in the competition. Customers don’t pay high prices every company follows a price skimming strategy, and demand doesn’t always increase when the price of the product changes.
A company that is barely making both ends meet; when it changes its price, then it would harm its sales. The first thing a company should do is to make the price and demand inelastic, the purpose is that changes in one factor shouldn’t affect the other. But not every company has the luxury to be inelastic.
Won’t Work in the Overcrowded Market
A market comprises of many competitors that are working in the same niche as you are; pricing your product or service becomes a very crucial stage in such circumstances. It is because if you launch your product with the skimming strategy, and the competitors came after with the price penetration strategy, then it would be a great set back.
The curve between demand and price isn’t inelastic in the crowded market with a lot of competitors. Therefore, business and the company shouldn’t follow the price skimming strategy in the competitive market.
When a business like Apple’s iPhone makes a profit with its price skimming strategy, then it would attract the attention of competitors like Samsun and Huawei. Soon after they would also launch their product with some more features but different styles. Apple won’t lower its product prices because it hasn’t covered up its costs. More and more competitors would keep on entering the market with the same or updated style.
The process continues until a company launches some unique products with new features, and the competitors would start following it again. That’s how the market usually operates; high profitable product attracts competitors to enter the market.
Early Users would be Furious
Whenever a company significantly lowers the price of its products and services; it is because of the competition or any other factor. It makes the old customers furious who have paid a higher price for the same product. Apple had to face the same backlash from customers back in 2007 when the company reduced the price of iPad 33%.
Therefore, the company should lower the price of its products and services gradually after the price skimming strategy. If a company changes the prices of its product hastily, then it would face severe reactions from its customers.
Examples of Price Skimming Strategy
Electronic products like mobile phones are great examples of price strategy. Whenever, a brand like Sony, LG, Samsung, Huawei, Apple, Google, Nokia Oppo, Vivo, or any other launches a new model of a mobile phone. Then the price of it is very high, the company follows the price strategy at this stage of the product life cycle. When other companies start offering the same product but with more features; or the company launches some new model, then the prices of the previous start declining gradually. Sometimes the company even stop manufacturing the previous model after launching the new models.