how price skimming works
price skimming is often used when a new product type enters the market the goal is to gather as much revenue as possible while high consumer demand and competition haven t entered the market this approach works well for products with a high perceived value or innovative features where early adopters are less sensitive to price initially targeting these consumers companies can recover their investment quickly and generate significant early profits once the market becomes more saturated with competitors lowering the price helps capture a broader audience and maintain market share key factors for effective price skimming include understanding the product s life cycle projected demand and the competitive landscape high demand allows for higher initial prices while increased competition necessitates price adjustments 4skimming can encourage the entry of competitors since other firms will notice the artificially high margins available in the product they will quickly enter this approach contrasts with the penetration pricing model which focuses on releasing a lower priced product to grab as much market share as possible this technique is generally better suited for lower cost items such as basic household supplies where price may be a driving factor in most customers production selections firms often use price skimming to recover development costs and in situations where for new products like innovative home technology a high initial price can signal quality and exclusivity this attracts early adopters willing to spend more and can generate valuable word of mouth marketing 5price skimming exampleone of the most common examples of price skimming is the launch of apple s iphone when apple introduces a new iphone model it tends to set a high initial price to target early adopters willing to pay a premium for the latest technology however as demand from this segment is met and newer iphone models are released apple gradually lowers the price of the older models to attract more price sensitive customers this strategy allows apple to maximize early revenue from a new product and gradually expand its market reach without alienating different customer segments by lowering prices over time apple can remain competitive and continues to generate sales throughout the product s life cycle price skimming carries a timing risk customers may switch to cheaper alternatives if the price reduction occurs too late this could lead to lost sales and reduced revenue as competitors capture more price sensitive customers however there s also the risk of dropping prices too early for example when apple reduced the price of its iphone by a third after only two months on the market loyal buyers complained forcing ceo steve jobs to apologize and offer a partial rebate 6price skimming limitsgenerally the price skimming model is best used for a short time allowing the early adopter market to become saturated but not alienating price conscious buyers over the long term if the price isn t reduced promptly consumers may turn to cheaper competitors resulting in lost sales and revenue price skimming may also be less effective for any competitor s follow up products for example once the initial market of early adopters has purchased the latest gaming console other buyers may not purchase a competing product at a higher price without significant improvements over the original 