If you’re offering a product or service that you think will have maximum value upon its initial release, you may want to adopt a price skimming model.
Understanding Price Skimming
Your business has just finished developing a product and you’re ready to offer it to your target market. Due to the nature of your offering however, you know that it will soon become dated or that competitors will eventually provide a similar (or perhaps even a better) alternative. The best way to capitalize on revenue would be to initially price the product at a premium, and then lower it over time based on competition and market demand. This technique is known as price skimming.
The idea behind this model is to first go after the early adopters who you know will be more likely to pay the higher cost to get access to the product, then reducing the price and expanding your target customers to include those who would only pay at lower price points, ultimately “skimming” through more consumer segments over time.
A good example of companies that leverage this pricing style are technology products like smartphones, video games, and DVD players, where the value of the item will never be higher than when it was initially released
Pros and Cons
The following are just a few of the key benefits to incorporating a price skimming model:
Quickly Recouping Costs
Due to the fact that you’re selling lots for a high price early, you’re much more likely to get your return on investment at a faster rate than you would with another pricing technique.
Because this pricing style relies heavily on skimming your prices to align with different segments, you’ll find that a lot of your work around understanding your different segments will come naturally through this process.
Perception of Value
As an added bonus, customers will also perceive your brand to be that of a very high quality because of the initial price point, even if it that isn’t necessarily the case. This is a great advantage if you’re looking to give your brand image a quick boost.
While there are some strong benefits to price skimming, there are an equal amount of risks that you’ll want to be fully aware of. Keep these in mind:
Not Ideal in Competitive Markets
If there are already competitors offering similar products or services, you likely will have a tough time gaining traction when you enter the fray with a premium price tag. This could drive away a lot of your potential customers.
Competitors will Increase
Additionally, this type of pricing format is also prone to attract new competitors that think they can capture part of your market share by offering a similar product at a lower price.
Frustrating your Early Adopters
From a PR standpoint, you could do exponential damage to your brand image if you lower the price of your product too soon after its initial release, ultimately angering the very segment that is most loyal to your brand.
Keys to Implementation
If you’re still feeling confident that the price skimming model makes sense for your business, then it’s time to understand how to implement it effectively. As mentioned earlier, the goal behind price skimming is to gain as much revenue as possible while the demand is at its peak (essentially the total opposite of penetration pricing), which means your business will need to make a few preparations to position yourself for success.
One of the things that makes Apple so successful whenever it launches a new iPhone model is that there is often a lot of marketing attention the product gets well before its launch. While it’s perhaps a little unconventional, ensure you’re establishing a significant marketing strategy before your solution hits the shelves to drive as much awareness as possible.
Show It Off
With a price skimming approach, you won’t want to pull any punches when promoting the value and the features of your product. As you’ll never price your product higher than at its launch, it’s important you drill down on everything that makes it so essential for your potential customers before competitors enter the fray with lower prices.
This one is extremely important. Depending on your product, you may find that there is high-demand and desire for your product for a long period of time. If you slash the price too quickly, you could be leaving a lot of money on the table. Conversely, if you wait too long to make the price adjustment, you could be missing out on a lot of business. It’s essential to keep a close eye on your numbers and make your price tweaks accordingly.
Know your Customers
At the end of the day, for a price skimming model to be successful, you will need to take the time and understand your customers. Determine how many different segments you have, what their price points are, and determine the best way to get them excited and using your product. If your communication strategy is on point, you’ll mitigate the impact of frustration around the inevitable price slash and maximize the number of new customers you’re onboarding. Knowledge is power, so use it early and often!