Price Skimming – Definitions, Examples, Pros and Cons

Price skimming is a type of price discrimination. Consider it a way to target people from different income levels and willingness to pay. Not all products suit this strategy, so read carefully before testing it out.

What is ecommerce price skimming?

In its simplest terms, it is setting a high price initially when entering a product market and gradually shaving off the price as the product evolves through its life cycle.

Especially when it’s a technological product, it takes a while before any competitor adopts the technology. So the pioneer company sets a high price and lowers it as the competitors catch up with their technology.

Early adopters, who can’t wait to get their hands on new technology, will buy it from the initial price. They not only cover your innovation costs, but they will be your word of mouth marketing channel.

But apply this pricing strategy to avoid wasting money on the table and plummeting market shares.

So keep in mind that it works well with innovative technology products.

Apple’s long-lasting price skimming strategy

Apple’s pricing strategy is the most famous example of price skimming.

Source

Was the iPhone the first smartphone? No. The first smartphone, also the first touchscreen technology phone, was IBM’s Simon Personal Communicator launched in 1992.

iPhone’s distinctive feature was the operating system installation on a cellphone that turns it into a palm-sized computer that can run applications. Moreover, its innovative nature attracted many early adopters that purchased 4 and 8 GB models and paid $499 and $599, respectively. Lastly, within an hour of its release, many stores reported stockout.

Two months after the first iPhone, the company released iPod, and the price of the 8GB iPhone dropped from $599 to $399. Initially, the price drop irritated early adopters. Apple offered store credit to them and urged those customers to buy the newest version.

At first, the company maintained product development at a good pace, therefore maintaining its competitive advantage. Eventually, others caught up with the technology, and the company had to lower prices.

For the first time in history, the company released the iPhone 11, for $50 cheaper than the last year’s comparable model.

Pros

• Price skimming covers the costs of innovation and provides money for product development.
• Early adopters naturally become the word-of-mouth marketing channels.
• It allows you to segment the market and target all at different price levels.
• You can create a higher-end brand image and increase customer loyalty.
• Price skimming creates the perception of high-quality or must-have products, which is great for your store.

Cons

• Early adopters will be disturbed by the price decreases.
• Eventually, every technology is adopted.
• You may end up with excess inventory if price skimming doesn’t work.
• The quality of your product should justify the higher price to be effective so the customers don’t feel abused.

Takeaways

The strategy fits perfectly for technologically innovative products since they give a business significant leverage until the technology is adaptable and open to development by other players.

Once they adopt your technology, lowering your prices before alienating customers is critical.