Price skimming is a pricing strategy by which you initially sell products at a high price, then reduce them over time. This strategy aims to generate profits quickly before competitors enter the market and start pressing prices. To be successful, you must determine the right market segment.
This short-term pricing strategy targets consumers who are willing to pay higher prices. In the initial stages, consumers are not too concerned with prices. They feel they must have a product.
In the innovation diffusion model, we often refer to these early buyers as innovators. They are only a small part of the population.
Once sales start to slow down, you will begin to lower prices so more customers can buy your product. The decline also occurred due to increased competitive pressure.
Price skimming can only function when there are few or no competitors on the market. This strategy is often encountered for products that are really new, such as computers at the beginning of its launch.
Good and bad about price skimming
You need to be aware of several disadvantages related to this strategy.
- High prices attract new competitors to enter. New competitors bring additional supplies, thereby depressing prices and profit margins. Are you ready to compete?
- Negative reputation if you reduce prices too quickly and without significant product changes. Early buyers will feel you have cheated them.
- The strategy is not suitable if demand is elastic and effective if the demand curve is inelastic. Simply put, consumers are not sensitive to price changes.
- Low inventory turnover. Initially, high prices mean low sales volumes. If you produce on a mass scale, it creates a buildup of goods in the warehouse.
From the good side, this strategy offers several advantages.
- High prices mean thick profit margins. You can raise money as the next innovation capital.
- Consumers will see your product as a quality product. It’s useful for building high-quality product images. When you reduce prices, you can argue that prices are lower not because of a decrease in quality but because the competition is more intensive. Your job is to convince consumers of that.
- You get a lot of money and can immediately recover the development costs.