Price Skimming- Your Business Guide
Price Skimming- Your Business Guide
What is a price skimming?
Price Skimming is a strategy where you launch your product at a high price, and gradually you wave off the costs as the period of existence of the product increases.
Price Skimming is a way through which you can capture a substantial part of the market by focusing on people with different levels of income and what they are willing to pay.
How does it work?
When you launch an innovative technological product in the market, you launch it at a higher price initially. The part of the market that is technology-obsessed would go for your product at the initial price.
This would help you to kill two birds with one stone. Firstly, you would be able to cover the costs of your innovation. Secondly, the customers would recommend your product to others by word of mouth, making other customers curious about the product.
You will get the first-mover advantage as it will take your competitors a while to catch up with your product. By the time they do that, you would have gradually shaved off your prices too.
This strategy might not work well for all the products. If not implemented properly and wisely, it might lead you into a trap where you won’t be able to tap your existing customers, also leading to the plummeting of market shares.
Apple’s most famous price skimming strategy:
Apple’s pricing strategy is the best example of a pricing strategy.
Did Apple launch the first smartphone? No, it was IBM’s Simon Personal Communicator, which was the first touchscreen smartphone.
But the iPhone brought innovation in technology by bringing in a smartphone that can run applications like a palm-sized computer in two variations of 4 & 8 GB costing £499 & £599, respectively. There were many early adopters of this technology who did the word of mouth recommendations for Apple.
In the following two months, a new and innovative device was again brought into the market, while waving off the price of 8 GB iPhone to £399.
Early adopters were anguished due to this move, and thus, the company requested them to buy the latest version while providing them store credit.
This strategy works very well for Apple iPhone.
Advantages & limitations of price skimming strategy:
Advantages
- 1. Cost of innovation is covered
- 2. Bring forth money for product development
- 3. Word of mouth channel makes other people more curious about technology
- 4. Capture a substantial part of the market
- 5. Target people of different levels of income
Disadvantages
- 1. Early-adopters might feel disrupted due to a gradual price decrease
- 2. Eventually, your technology would be adopted
Takeaways:
A strategy that would fit seamlessly in your business if you are into innovative technology sectors by providing a first-mover advantage to you.
All you need to make sure is that you implement it thoughtfully.
FREQUENTLY ASKED QUESTIONS (FAQs)
Q1. Should I go for price skimming?
Ans. It depends upon your type of business. If you are launching innovative technology-driven products, you can definitely go for it.
Q2. Why do we need to use price skimming?
Ans. We need to use price skimming as a strategy to cover innovation costs and capture a significant market at different levels of prices.
Q3. Which company is the best to study too closely observe this strategy?
Ans. You can study the pricing strategies of iPhones to understand this concept.
