Skimming pricing strategy

From CEOpedia | Management online

Skimming pricing strategy involves the use of inflated prices in the short term. In this way, company highly values new products or most wanted versions of all available products. These products have a relative competitive advantage, because the demand, at least in the initial stage, is relatively inelastic. Short-term conditions relating to the evolution of this strategy arise from the fact that sooner or later competitors come on the market with similar or identical products. Competing products will eliminate the advantage position obtained thanks to the precedence and prime prices of these products.

Applications of skimming pricing strategy

Skimming pricing strategy is good for innovative, unique or highly improved products. In this case costs for research and promotion are usually high. High prices and margins are needed to cover these costs, and the costs associated with smaller volume of production in the initial stage. An additional element that allows companies to quickly collect the cream is to build prestige with high quality product and high prices during the introduction of the product on the market.

Besides, an important advantage of this strategy is that it is easier to lower prices than raise them. By applying the strategies companies can bring down prices in a situation of competition. Strategy of cream collection is also very effective in segmenting of market. Because this strategy involves high prices, it is liked by the dealers because it provides them with high margins.

Skimming pricing strategy is particularly useful in the case of selling products attractive to the eyes of the customer, because during the introduction of such a product they are more sensitive to prestige rather than on price. This strategy works equally well when selling branded products of high quality.

Examples of Skimming pricing strategy

  • Apple's iPhone 8: Apple launched their iPhone 8 at an inflated price to capitalize on the hype surrounding the release. This allowed them to quickly recoup the cost of research and development and take advantage of the pent-up demand.
  • Video game releases: Console game releases are often priced higher than the base model in order to maximize profits. This is particularly true for special edition console bundles, which often come with discounts on game purchases, additional downloadable content, and other extras.
  • Luxury cars: Many luxury cars have a much higher price tag than their non-luxury counterparts. This is because the manufacturers are targeting a more affluent customer base, and are willing to charge higher prices for the added features and prestige associated with the brand.

Advantages of Skimming pricing strategy

Skimming pricing strategy can bring a number of advantages for companies, including:

  • Generating quick profits. This strategy allows companies to take advantage of new products’ high demand and capitalize on the inelasticity of the market to obtain the highest possible profits in the short term.
  • Establishing a premium brand. By charging a premium price, companies can create an impression of higher quality among consumers and establish a premium brand.
  • Generating word-of-mouth marketing. High prices often generate curiosity and buzz among consumers, which can lead to positive word-of-mouth marketing.
  • Increasing margins. Skimming pricing strategy allows companies to increase their margins by maximizing profits when demand is high.

Limitations of Skimming pricing strategy

One of the main limitations of the skimming pricing strategy is that it can only be used in the short term. The following are some other limitations of skimming pricing strategy:

  • It can reduce the customer base, as customers may be unwilling to pay the premium prices for the product.
  • It may attract competitors to the market, which can result in a decrease in the demand for the product.
  • It can lead to a decrease in profits over time, as customers become increasingly price-sensitive.
  • It can lead to customer dissatisfaction with the perceived lack of value for money.
  • It can lead to a decrease in the brand’s reputation, as customers may perceive the company as exploiting them.

Other approaches related to Skimming pricing strategy

To complement the Skimming pricing strategy, there are several other approaches that companies can use to increase their profit margin. These are:

  • Penetration Pricing: This strategy entails offering a product or service at a lower price than the competition in order to increase market share. The goal is to use the lower prices to attract more customers and establish a larger customer base.
  • Price Bundling: This strategy involves combining several products or services together and selling them as a bundle at a single price. This allows companies to increase their profits by giving customers a price discount for buying in bulk.
  • Value-Based Pricing: This strategy involves setting prices based on the perceived value of the product or service, rather than on the cost of production or demand. The goal is to maximize profit by charging different prices for different customer segments.
  • Price Discrimination: This strategy involves charging different prices for the same product or service depending on the customer's ability or willingness to pay. It is used to maximize profits by targeting different customer segments and charging them different prices for the same product or service.

In summary, there are several approaches companies can use to complement the Skimming pricing strategy in order to maximize their profits. These include penetration pricing, price bundling, value-based pricing, and price discrimination.

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