By applying a price skimming strategy for a new product, brands can recover the expenses incurred toward R&D, and understand the customer demand for the product at various price points.
The saying ‘Make Hay While The Sun Shines’ is apt when pricing products that are first movers in any category. This popular proverb means to make the most of an opportunity when it is available. In a retail scenario, products that introduce unique features, enjoy customers’ attention, especially in a monopolistic market. All the brands that use a price-skimming strategy gather maximum profit in the initial phase of the product life cycle.
The article looks at various examples from the industry that have successfully implemented a price-skimming strategy.
- What is Price Skimming?
- How Successful is the Price Skimming Strategy?
- Stages of Customer Adoption in the Case of a New Product
- E-Commerce Examples of Price Skimming
- Price Skimming vs. Prestige Pricing: Are Both Different?
- Difference Between Price Skimming and Penetration Pricing
- Automated Price Monitoring To Keep Up With Competition
What is Price Skimming?
Brands that have a noteworthy product or a most-awaited version of a product implement price skimming (also known as skim pricing). This pricing is dynamic as at launch, the products are priced steeply and gradually lowered to attract price-sensitive customers. Based on pricing, the product lifecycle is divided into four phases.
How Successful is the Price Skimming Strategy?
Skim pricing strategy helps brands to see the demand for their product. The initial high price helps to recover the expenses incurred toward R&D and the cost to produce the product. The product earns maximum profit in this phase, especially in a monopolistic market. The skimming strategy is usually viable only until competitors launch similar products, but there are a few brands that continue to enjoy the largest market share as they get many other market dynamics in their favor.
Established companies usually spend on advertising and marketing to create hype around their product innovations. As such products typically do not have competitors or any evidence of how customers will receive them, brands experiment with price skimming.
A brand can find success implementing pricing skimming if:
- The product has unique features to satisfy the strong desire of brand-loyal affluent customers.
- The goal of the brand is to gather as much revenue as possible before any competition enters the market.
- The brand belongs to an industry where trends change quite rapidly or add on innovative features often.
Stages of Customer Adoption in the Case of a New Product
Measuring the customer adoption pattern for a given product lets the company understand how quickly consumers learn to use a product or service effectively.
All consumers who make purchases fall under one of these five categories:
This category of customers is the adventurous lot. They trust the brand to book a new product during the pre-launch period without having a look at the product.
Most millennials wish for instant gratification and are ready to pay high prices for fear of missing out on new launches. These customers typically post status updates along with trending products on social media for external validation.
These customers are cautious and have the “wait and see” approach. They study the pros and cons of the product before buying a product.
This risk-averse group of customers makes major buying decisions only after more than half of the population buys and says positive reviews about the product.
This category of customers usually delays their purchase to get the product at an affordable price.
Also Read: All About Product Mix Pricing
E-Commerce Examples of Price Skimming
Here are nine instances where brands have leveraged using a price-skimming strategy. This strategy has been successful as they have sizeable prospective buyers who see value in the product and are willing to buy the same at high prices.
Here are the details:
Skim Pricing Used by Dell
Ultrasharp 8K monitor – the first of its kind, is Dell’s innovation. Dell launched its first UP3218K monitor in 2017 at a price tag of $4,999. In 2023, though there is a drop from the initial price, it is still pricey at $3724.
The product has been around for the last six years and nine competitors have joined this category. The market demand for 8k technology is seen across projectors, TVs, notebooks, game consoles, and professional cameras. But, for a wholesome experience, a specialized satellite for broadcasting 8K video content that is compatible with 8K monitors needs to be developed. To see a full-fledged adoption of products incorporated with this technology, it might take a year or two more. When the price falls, demand will ramp up too.
Another product of Dell that uses price skimming is its premium Alienware series of laptops which is in high demand among gamers.
Price Skimming by Sony PlayStation 5
For the very first time, the transition from cartridges to compact discs happened and it instantly gained popularity.
The company had priced the PS2 conservatively and realized that there were many potential buyers and no competitors for the PS3. So, they launched PS3 at $599 and reduced the price gradually to $299 before it was discontinued. Again in the example below, we see a price skimming strategy implemented for Sony’s gaming consoles – PS5 Standard, and PS5 Digital.
In November 2020, Sony’s PS5 launched for $499, which dropped to $469 by May 2021, and precisely a year after the launch in Nov 2021 price further dropped to $432. So, we see a $54-67 reduction in price within a year.
Price Skimming in the Tommy Hilfiger Collection
Almost all fashion brands, besides luxury brands, that have exclusive collections for each season use price-skimming as one of their pricing strategies in their product lifecycle. The new collection is launched at a high price, but over time, the price is reduced. In the image below, we see a new pack of 4 baby suits from Tommy was priced at $42, which has come down to $25.20, and the previous collection is reduced to $18.
Nike’s Skim Pricing on Limited Edition
Besides strategies like prestige, penetration, and segmented pricing, Nike applies a price-skimming strategy for its limited editions. The launch price of the rare collections ranges between $119 to $3,570. This sports brand tries to skim money from customers willing to pay high prices for exclusive designs. For six months, the products are sold at peak price, thereafter, the brand reduces the price of its special collection.
FitBit Skims Price
The Fitbit Sense is a health smartwatch that was released in September 2020 at a price tag of $329. A year later with more upgrades, Fitbit Sense 2 was released for $300 and the Fitbit Sense 3 is expected to be released in 2024 for around the same price. When a new model is released in the market or even the news of an upcoming model is out, the previous year’s lineup of FitBit gets a price cut. Given below is the present price of FitbitSense 1 which has come down to $172.56.
Skim Pricing With Product Versioning in the Book Industry
In the book market, when a new book is published in hardcover it is priced high. If the book turns out to be a bestseller, it is published in paperback at a much-reduced price.
In the above example, the Teenage Mutant Ninja Turtles: The IDW Collection launch price in hardcover was $59.99 in 2015. The collection was published in paperback soon after the collection gained popularity. Eight years later the price of both hardcover and paperback has been reduced.
Kindle’s Price Skimming in the Initial Years
The first-generation Kindle was a one-of-a-kind revolutionary product introduced in 2007. Amazon put a price tag of $400 at launch and by the sixth year, it touched the lowest of $99. In 2014, as the demand for this product continued, Amazon updated the technology and increased the price.
Apple Shifting Away From Skim Strategy
Owning any of Apple’s products is considered a status symbol as it has a brand image associated with high quality. Until recently, Apple applied a price-skimming strategy to all its products. The products were launched at high prices and gradually the cost was reduced.
For example, an Apple iPad 64GB is a versatile device that was created to be between a laptop and a smartphone. Though the product was available in the US market only by March 2010, the company started taking pre-orders in January 2010 for $829. Having many customers who have an intense desire to be among the initial customers to own the product, price skimming works well for Apple. In 2023, the 10th generation Apple iPad is available for $449.The same is the case with its smartphone. In the image below we see a marked depreciation in the iPhone 12 model in six months from launch.
Since the iPhone has been able to hold its value better in the smartphone market, the average market value of Apple has reached over US$3 trillion in 2022. In the newer models, the company seems to be applying prestige pricing as the price remains constant. Even with the change in pricing strategy, the number of potential takers for its latest technology is just increasing. The brand maintains the novelty factor by upgrading every new version. Increasing production costs and a premium brand image are other reasons for the unwavering price of Apple’s latest products.
Samsung Effectively Skims Price
Similarly, when it comes to premium Android smartphone Samsung skims price. The brand launches the product at the highest price to garner maximum profit during the initial phase when customer demand for the product is at its peak. The product usually has features that compete directly against the latest iPhone. In the example here, Samsung Galaxy S23 Ultra, seven months after launch, the product sees 14% depreciation.
Price Skimming vs. Prestige Pricing: Are Both Different?
Price skimming and prestige pricing are based on the principle of value-based pricing as customers’ perceived value is kept in mind. In both cases, a high price tag is assigned to the products at launch.
Also known as image pricing, high-end brands such as Gucci, Chanel, Louis Vuitton, etc. use a prestige pricing strategy as they enjoy a high brand image. The consumers who buy these brands are keen to project an elevated status to the public.
Read our article on 10 Brands That Have Used Prestige Pricing Strategy
Difference Between Price Skimming and Penetration Pricing
A company may not always innovate. Sometimes, they may be just producing substitutes similar to a first mover in their segment. As in the case of price skimming, products applying penetration pricing don’t have the first-mover advantage. The intention of companies applying penetration pricing is solely to capture a bigger market share. Therefore, the price of the new products may sometimes be as low as the cost price to kill the sales of competitors.
Automated Price Monitoring To Keep Up With Competition
Price is an important decision-making factor when shopping. Besides depreciating value, factors like a rise in production cost and inflation may contribute to price increases. Most of the brands use multiple pricing strategies at various phases in a product lifecycle. For instance, after using price skimming all these years, the slope of the Apple iPhone price graph is moving upward and remaining constant. Now, this is a sign of prestige pricing. This move is probably due to the 3% increase in Apple’s production cost imposed by China. Despite the price increase, if your customers see value in your product that none other can provide, then they might pay the price you command.
On e-commerce platforms like Amazon or Walmart, we see brands at different stages in their lifecycle vying for customer attention using different pricing strategies. MetricsCart offers a speedy automated, price-monitoring service that will help your brand stay ahead of the game, leaving your competitors behind. We offer solutions for geographic visibility, organic search analysis, assortment optimization, content compliance, and more. Contact MetricsCart today for any digital shelf analytics solutions and see the difference we can make for your business!