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Definition, Strategy, And Examples Of Price Skimming

Price discrimination may be a kind of price skimming. New products are initially offered at exorbitant prices to entice "early adopters" into purchasing them. This is done to maximize profit. By selling the goods to a wider variety of customers, the price is gradually reduced to maximize profit.

Feb 15, 202229.7K Shares464.4K ViewsWritten By: Alastair MartinReviewed By: James Smith
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  1. What Is Price Skimming?
  2. How Does Price Skimming Work?
  3. Price Skimming Strategy
  4. Price Skimming Examples
  5. Summary- Know Your Market Before Implementing Price Skimming

A nascent SaaS company's price approach is critical.It not only determines your early monetization plan, but also which market groups you'll target and how your product will be perceived.

Of sure, a superior product will appeal to more individuals.So how can you create a pricing strategy that doesn't limit your product's appeal?How do you target the wealthy upper-market segments without alienating the lower-wage earners?

Price skimmingis one method.Not every organization can afford such a stringent approach.But if you understand how price skimming works and execute it correctly, it may provide you a big competitive edge, raise your client base and market share, improve your revenue, and increase the value of your product and company.

Price Skimming

What Is Price Skimming?

It is a pricing technique whereby a product or service is initially priced high and subsequently reduced as buyers become familiar with it.This strategy does not target the mass market.

This method is termed penetration pricing, which sets prices low to enter markets.

How Does Price Skimming Work?

Regardless of whether the price truly represents the value of a cutting-edge product, customers who are known as "early adopters" will pay higher costs for it.Prices are eventually dropped in order to keep up with the demand for the goods and draw in more price-sensitive consumers.

Theoretically, a corporation can capture some of the consumer surplus by charging the maximum price each section is willing to pay as each customer segment is "skimmed" off the top.

However, price skimming can successfully segment the market but it is practically impossible to capture all of the consumer surpluses with this method.Because demand for a product is inelastic to price changes, price skimming is most successful when quantities purchased remain stable despite price fluctuations (for more on this, see our post on price elasticity).

Since the price of cutting-edge products like the iPhone has the potential to be inelastic, corporations may be able to charge the highest prices for them.When it comes to price skimming, there are both positive and negative aspects to consider.

Price Skimming Strategy

Customers who buy at high costs are targeted through price skimming.The more clients a firm can reach by lowering its prices is a surefire way to increase sales.

Popular shoe releases are subject to price skimming by Nike, a well-known shoe and apparel maker and retailer.This is accomplished by charging a premium for new and limited edition products.

Nike, for example, has no problem raising its costs because it is one of the most popular brands in the world.Nike's trainers are in high demand, and customers are willing to pay a premium to be associated with the Nike brand.When Nike releases a new product, it lowers the price many months later in order to appeal to a wider range of customers.

The interplay of online and off-line sales is an additional strategic consideration.The Ropo Effect (online research, offline purchase) may enhance in-store sales if retailers align in-store and online prices.

Price Skimming Examples

Apple, Samsung, Sony, and other IT giants, such as Google, Amazon, and Microsoft, are the most common examples of price skimming.

There are many conditions that must be in place for price skimming to be a really effective dynamic pricingscheme, despite its obvious advantages.Let's take a look at some real-world examples of price skimming to see when it's most effective.

The Latest IPhone

Apple's approach to product pricing may not be strictly SaaS, but price skimming is exemplified in a way that almost everyone can identify.When it comes to freshly released products, Apple's prices are so exorbitant that they're practically discouraging, yet there are always lines outside of Apple stores on the days of the latest iPhone launch.

Thus, Apple is perfectly situated to reap the benefits of price-skimming.Aspirational for any technological firm is the company's command of so many successful product launches and its associated price-skimming strategy.

Salesforce

In the SaaS industry, Salesforce was a leading proponent of the price-skimming ethos.In order to support its pricing approach, the company sparked a complete paradigm shift in the SaaS sector.Cloud-based CRM was pioneered by Salesforce, which was the first of its sort.

Salesforce is a prime example of a corporation whose technology supported a price-skimming approach due to the disruptive nature of its cloud product.

Salesforce was able to make a great amount of moneyrapidly thanks to its ability to secure enterprise-level transactions with large corporations.Scaling down to serve smaller organizations who also sought out the cutting-edge CRM became possible later on.

Even as CRMs have become more mainstream, few firms have adopted Salesforce's successful approach of skimming.

Summary- Know Your Market Before Implementing Price Skimming

As long as you're on the lookout for the potential drawbacks as well as the advantages, price skimming can be an effective way to set a new product's price point.The improper move or rapid price reductions can evoke the dreaded PR reaction when you set high beginning prices and reduce them over time.

The exact shape of the demand curve and the possibility of executing a price skimming strategy can be discovered by analyzing and understanding what customers appreciate about your service.Skimming can bring in the moneyyou need to swiftly recoup development expenditures, keep updating the product, and assure your business's longevity if there are few competitors in the market and you communicate the price reductions successfully.

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