Smartphone market? Too Competitive! Like so many new brands are doing so well there but still when a new Apple iPhone launches at a huge price (the kidney selling joke never gets old here!), people go crazy and want to own it asap! Ever wondered why? Like there are so many new more affordable options to choose from but Apple is least bothered and still prices its new launches at a very high price. But why? It’s because they follow the pricing strategy known as skimming pricing!
If you are starting a business, the most common first thought would be to keep a low price for your product. The reason is simple, you want people to buy it and generally people love buying new quality products at lower or discounted prices. But, this innovative concept really took me for a surprise. Here, this normal thing went for a toss and it was all about brands selling their new products at the highest possible prices and this concept was skimming pricing!
What Exactly is Skimming Pricing?
While searching more about it, I came across big terms like early adopters, price sensitivity and what not! Keeping it super simple the idea behind this pricing strategy is when a brand launches a new product, many consumers are interested in owning it before others do.
For this they are even willing to pay a premium price and the brand takes benefit of it by setting a high initial price for the said product. They enjoy higher profits and have better chances of recovering their investment quickly. After a point of time the brand lowers this price to start catering to a broader group of customers.
Why is it Called Skimming Pricing?
Super story behind it! Remember those childhood memories when a naughty cousin used to skim all the milk cream from the milk and used to get lots of scolding since what was left was milk with less or no cream (are you that cousin?!)?
Same principle applies behind this name. It’s like giving the consumers the satisfaction of ‘skimming the cream’ from the top of the market. They want to own the product before others do and for that they are surely willing to pay a premium price.
Fun Fact: An Economics Principle Applies Here- Conspicuous Consumption
Imagine everyone in your friends circle owns the latest Samsung S25 smartphone and now you want it too! Result? If you have enough resources, you don’t think twice and buy it. Even when you know you can own the same phone at a lower price after a few months or buy a phone with similar features at a lower price from a lesser known brand, you still shell out huge money! This behaviour is known as conspicuous consumption.
That means you got inclined to take a buying decision only because of perceived prestige associated with this smartphone. Brands set skimming pricing leveraging on the fact that their early consumers are willing to pay a premium price to either show off their economic status or due to the perceived prestige.
(My love for Economics makes me link the majority of these amazing management terms with it!)
Why Do Businesses Use Skimming Pricing Strategy?
No wonder for well established brands, majority of the times this pricing strategy works when they launch new products! But still why go for it? They can instead sell at a lower price and make more profit by reaching a larger audience, right? Nope, that’s actually not the case.
Businesses adopt skimming pricing to,
1. Recover their high initial investment (mainly due to R&D) on a new product quickly.
2. Attract customers who love exclusivity and won’t shy away to pay a premium price for it.
3. Cater to a market which is more focused on luxury seeking customers.
4. Position their product in the high quality, innovative and unique segment.
Also in their case, lowering the price does not affect their sales volume a lot nor does it bring the per unit cost down to a major level.
In short, skimming pricing is the best option for the brands too over here!
But isn’t skimming pricing risky? Yes, it is! Biggest risk is timing. If the brand doesn’t reduce the price at the correct time, they might lose the broader set of customers. Also, if they do it too soon, it may create dissatisfaction in their early customers. It’s a double edged sword!
Is Price Skimming Good For Every Business?
Not really! Mostly when you search for examples, prominent brands especially tech companies like Apple, Sony, Samsung etc. use price skimming. Even luxury brands like Gucci, Rolex etc. go in for this pricing strategy. Reason is simple: their brand is already established and customers are willing to pay a premium price for owning their new product.
But it doesn’t mean new brands don’t try this pricing strategy. If their products are either,
High Quality
Exclusive
Innovative
Catering to luxury lovers
Or boasting of a unique craftsmanship
Then even newer brands can enjoy this skimming pricing strategy. Woah! That does sound so cool, but be careful because your products need to have that kind of power to attract the audience too!
What One Needs to Consider Before Setting a Skim Price?
While reading a case study, I came across a precious stone based business’s story on how they lost the consumers at the early start of their business only because they kept the price too high. Though it was justified because their products were exclusive, the market demand was also there and the raw materials were costly as well. Still they were unable to find that zest in their sales figures.
If you are planning to adopt this strategy for your business, you need to be careful too. Here’s all you need to consider,
Trust Factor
Unless the audience trusts the brand, they won’t find the confidence to shell out a premium price for owning a product. In short, brand image should be strong.
Thorough Market Research
Customer’s interest should be prominent. People actually wait for Apple’s iPhone to launch! Similarly your consumers should be excited to own your product.
Non Existent Competition
Simple maths, if a business is making huge profits by selling at a high price and there is close competition, the competitors will be super fast to enter the market and start taking the benefit of it. But if there’s no or less competition, it’s tough to do so. (Here an Economics theory applies, can you guess it?).
Novelty Value
Products should have an exclusive or novelty value. If consumers find prestige in owning the product, they don’t care much about the price point.
High Initial Development Cost
Thorough R&D justifies the high price of a new much in demand product too!
All in all, brands do have a well thought of research before setting high prices of their products! It’s no guesswork.
Penetration Pricing vs. Skimming Pricing
An often confused difference, but this example will help. A new ABC company comes up with a small 100 gms packet of Glucose biscuit. What do they do? They keep its price at Rs. 9, because the majority of their competitors are selling the same quantity at Rs. 10. This is called penetrative pricing.
In short, when brands launch a new product at a lower price or discounted price to reach a wider set of audience and capture a bigger market share, they are following a penetrative pricing strategy. On the other hand, the skimming strategy is exactly opposite as the initial price is set high and the initial goal is not to cater to a larger set of consumers.
Who knew that the super costly prices of a Birkin handbag or Apple Macbook was no fluke! It was actually a well thought of pricing strategy. I loved uncovering the logic behind this concept, and hope you enjoyed it too. Do share your thoughts with me in the comments section below.