Price skimming is a pricing strategy used by companies to charge the highest initial price that customers will pay when introducing a new product or service. Over time, as the demand of the first customers is satisfied or competition enters the market, the firm lowers the price to attract another, more price-sensitive segment of the population.
The skimming strategy gets its name from “skimming” successive layers of cream, or customer segments, as prices are lowered over time.
This strategy is often used for new technology, patented products, or products with a distinct competitive advantage to justify the higher price. The objective is to maximize profit from the segment of the market that is less sensitive to price and willing to pay for the innovation, exclusivity, or prestige of the product.
For price skimming to be effective, the product or service must be perceived as breaking new ground or offering a significant leap forward in terms of quality or benefits. Otherwise, consumers may not be willing to pay the higher initial price.
Please note that price skimming is not suitable for all types of products and services, and the decision to use this pricing strategy should be based on a thorough understanding of the market and the customer base.
Example of Price Skimming
Let’s take the example of Apple and their iPhone product line.
When Apple introduces a new model of the iPhone, it often employs a price skimming strategy. The new model often comes with significant upgrades and innovative features that aren’t yet available on other smartphones. Because of these new features and the strong Apple brand, many customers are willing to pay a high price to get the new iPhone as soon as it comes out.
So, Apple initially sets a high price for the new iPhone model. For instance, when the iPhone X was first launched in 2017, its starting price was $999, significantly higher than previous iPhone models.
Once the initial demand from these high-end customers has been met and competitors start to catch up with similar features, Apple begins to lower the price of the iPhone. This allows them to tap into a new segment of customers who are more price-sensitive and who may not have been able to afford the initial high price.
By the time the next iPhone model is ready to launch, the price of the previous model has often been significantly reduced, and the cycle begins again with the new model being priced at a premium.
In this way, Apple uses price skimming to maximize its profits, starting with high prices for early adopters and then gradually reducing prices to reach more price-sensitive customers.