How Does Price Skimming Approach Work?

Now that your business is ready, the next step is to distribute your products. But before doing so, have you thought about your pricing strategy?

A pricing strategy consists of various pricing techniques entrepreneurs use to bring sales and revenue to the company. One of the most popular pricing strategies well-established brands use nowadays is price skimming.

A Look into Price Skimming Approach

A majority of huge companies, for example, Apple iPhone and Sony PlayStation, use the price skimming model as a pricing strategy.

Price skimming strategy is where a business sets the price of products or services at a high initial price at the time of launching and gradually lowers as consumers become accustomed and familiar with it. The strategy is often used in the automobile, electronics, and digital industries, wherein the first movers are common. A first mover is an advantage to all types of businesses. Its goal is to introduce new products or innovations to consumers with little to no competition.

What is the Rationale of the Price Skimming Approach? 

The idea behind this pricing strategy is to maximize profit when there is no competition. When a new product is developed, consumers will focus only on a single product since there is no competition in the market. This pricing technique generates maximum profit in a short amount of time. In such a short period, a company may recover all the costs in producing the product and gain revenues as well before a competitor rises.

Price skimming strategy proves effective but not always. Well-known brands may take advantage of its benefits; however, it won’t be as effective for newly established businesses. Moreover, it is not a viable long-term strategy. Competitors will eventually launch products that rival or have even better features than the currently released item, which may result in a huge drop in the company’s sales.

What are the Pros and Cons of the Price Skimming Approach? 

Price skimming has several advantages and disadvantages as well. Here are the things a company may gain from this approach and its flaws.

The primary advantage of price skimming is the ability of this strategy to build a high-quality image of the product. It boosts the product’s reputation and perception.

It also helps the business recover from sunk costs. The high initial price drives higher sales in the company enough to recover the costs from its development and earn profit at the same time. The high-profit margin of this technique is likewise a reason why many well-known brands use this pricing approach.

On the other side of the coin, the cons of price skimming are some consumers may not be willing to spend on the product due to its high price. People who are familiar with this strategy tend to wait for the product to lower its price, which is not exactly the aim of this approach.

High initial price likewise tends to generate few sales. Thus, one could not expect economies of scale to work on the business if the pricing strategy brings low sales.

Most importantly, price skimming is inefficient. It is not a long-term strategy since many companies launch new products that may be even better.

In a nutshell, price skimming is a risky pricing strategy. Before using this technique, make sure to assess the business and conduct research if it fits the company.