In any industry, it`s important to evaluate customer reviews and analyze the competition (and their market share) before setting your prices. If you already have a lot of competitors, your demand curve is probably quite elastic, and high prices when launching your product will make customers run the other way. Price skimming is not a viable strategy in an already busy market. If your product doesn`t include amazing new features that no one can match, it may be a good idea to avoid skimming if you want to gain a competitive advantage. For price absorption to work, a company should ideally meet the following criteria: Price skimming is typically used for new technologies. DVD players are a good example. When DVD players hit the market in the late `90s, they could cost you up to $1,000. Now, if you do a quick search on Amazon, you`ll find that a new DVD player will only cost you $33. I bore you with this story about my music business because Apple is constantly following a pattern of releasing new versions of their products and price drops. Customers who want the latest and greatest knowingly buy at a higher price, knowing that the price is likely to drop in less than six months. Apple values its innovative products higher in their initial release because the company knows that higher prices won`t reduce customer demand for the latest gadgets, and they enjoy higher short-term profit margins. Let`s explore this concept, discuss the pros and cons of pricing skimming, while explaining where tactics fit into your pricing strategy. Using a pricing skimming strategy means that you need to precisely control the development of your product after launch.
Enthusiasm for your product is probably highest immediately after publication. By prioritizing your initial efforts to target higher segments of the market, you can quickly recover development costs and realize a stable initial profit. It`s also less likely that your product will face direct competition immediately after release. And if competition arises for your product, you`ve cemented your reputation with that first wave of satisfied customers. At this point, you are able to lower your prices to enter the lower levels of the market. If done right, it can be an effective counter-tactic against any competitor trying to eliminate your advantage through a penetration pricing strategy. If you`re entering a highly saturated market with an undifferentiated product, it`s probably not the smartest idea to make a high-priced markup. Essentially, you`re not showing a competitive advantage or a reason for buyers to choose you.
Since skimming – in the grand scheme of everyday shopping – is a relatively unusual approach, good use can create some perception of your brand by the market. In short, before using this strategy or any other, it is inevitable to conduct a study of the market in which you want to operate and your competitors. Doing this manually is an inefficient way that costs you time and money that you could invest in improving the prices of your products. To conduct a study automatically and regularly updated, you can use tools to monitor prices and products. As mentioned above, pricing skimming is most effective when your business can rely on the context surrounding product launches to be in your favor. While some of the most famous examples of successful price skimming are hardware as opposed to SaaS, the lifecycle of technology adoption still makes it a more than viable pricing strategy for SaaS companies. This is especially true for SaaS companies whose main market targets are high-end and tend to close enterprise-level deals. The latest technology has a strong social currency. If your product can generate strong word-of-mouth, these early adopters can not only generate a lot of revenue for you, but also become a major source of recurring revenue. Reverse price skimming: airlines often use reverse price skimming by first announcing a limited number of low-cost seats, then gradually increasing the price as more seats are occupied and the flight is finally full (in practice, this is all the more complex as airlines use sophisticated software to dynamically adjust their prices in real time, to maintain high capacity utilization and maximize revenues). Penetration pricing is a pricing strategy in which a company sets a low price for a new product in order to gain market share, usually with the intention of raising prices in the future.
The purpose of penetration pricing is to attract customers from competitors with low initial prices for new products and brands. Consumers tend to continue consuming the products and brands they know, allowing them to continue using the new product even if prices increase over time. Price skimming is a strategy that companies with strong brands often use to maximize profits by first calculating the highest possible price for an innovative new product and then gradually reducing the price over time to target (skimm) more price-sensitive market customer segments. Successfully executed, the company can quickly recover the cost of bringing the new product to market before competition kicks in. But is skimming prices a good pricing strategy for your business? Charging an initially high price, then gradually lowering it to attract more price-sensitive customers Some of the best-known examples include electronics brands that rely on this strategy during the product launch phase. Their marketing strategies are often focused on promoting new product features and rely on consumers willing to pay a higher price for a sense of exclusivity. Price skimming is a strategy used by many companies, but perhaps the most famous example would be the first launch of the iPhone. The first-generation iPhone has generated a lot of excitement with its innovative design. The starting price was $499 for the 4GB model and $599 for the 8GB model, and both sold out in a short time.
However, two months after the initial launch, Apple lowered its 8GB model to $399. After analyzing the advantages and disadvantages, we can see that the skimming pricing strategy is a remarkable method of setting the price of a new innovative product, provided you pay attention to the pitfalls. Be careful when setting high initial prices and reducing them over time, as a bad decision or quick price cuts can trigger this dreaded PR backlash. By analyzing and understanding what your loyal customers value in your offering, you can uncover the true nature of the demand curve as well as the viability of implementing a pricing skimming strategy. As long as there are few competitors in the market and you effectively communicate price drops, skimming can generate the revenue you need to quickly cover development costs, continue to upgrade the product, and ensure the survival of your business. One way to do this is to skim prices. This is a sophisticated approach that is not suitable for all businesses. But if you learn how price skimming works and execute it correctly, it can give you an unparalleled competitive advantage, help you increase your customer base and market share, and dramatically increase sales and the appreciation in which your product and business are held. Do you remember the brand evangelists who bought your product first? You may as well unleash your worst PR nightmare.
If prices drop too much or too soon after the initial product launch, your early adopters will feel like they`ve been losing. Apple experienced this kind of backlash in 2007, when the company cut the price of the iPhone by $200 just two months after its launch. The rapid 33% drop in price from $599 to $399 may have helped boost demand, but some of the phone`s early adopters were understandably upset. To understand the mechanics of this strategy, it is important to know the price elasticity of demand – the impact of price changes on consumer demand – and the type of competitors you have. These types of strategies will work best in a market where demand is inelastic. To learn more about your competitors, you can use monitoring tools to know the position of your ecommerce in relation to the market and the competition. Still not sure if skimming prices is the best approach for your pricing strategy? Download HubSpot`s Sales Pricing Strategy Calculator to predict how much revenue and profit you`ll make with nine different pricing strategies, including pricing skimming. As you can see, price skimming marketing has distinct advantages and disadvantages. Whether or not this type of strategy makes sense for your business depends on your level of innovation, the demographics of your existing customers, and the competition in the market.
Competition between firms is generally good for consumers because businesses generally cannot get away with setting unreasonably high prices. If one company sets prices too high, consumers simply buy products from another company. If predatory pricing is not controlled, it can lead to a monopoly where a single firm is the sole supplier of goods or services. Moral of the story? If your skimming strategy becomes the norm, it may defeat the purpose of this pricing in the first place, as many buyers might instead wait to buy if they know the price is about to drop (I see you, Apple). Price skimming only works with an inelastic demand curve that does not respond to price changes.