Loading the player...

What is 'Price Skimming'

Price skimming is a product pricing strategy by which a firm charges the highest initial price that customers will pay and lowers it over time. As the demand of the first customers is satisfied and competition enters the market, the firm lowers the price to attract another, more price-sensitive segment. The skimming strategy gets its name from skimming successive layers of cream, or customer segments, as prices are lowered over time.

Breaking Down 'Price Skimming'

Price skimming is often used when a new type of product enters the market. The goal is to gather as much revenue as possible while consumer demand is high and competition has not entered the market. Once those goals are met, the original product creator can lower prices to attract more cost-conscious buyers while remaining competitive toward any lower-cost copycat items entering the market.

This approach contrasts with the penetration pricing model, which focuses on releasing a lower-priced product to grab as much market share as possible. Generally, this technique is 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 skimming to recover the cost of development. Skimming is a useful strategy when:

  • There are enough prospective customers willing to buy the product at the high price.
  • The high price does not attract competitors.
  • Lowering the price would have only a minor effect on increasing sales volume and reducing unit costs.
  • The high price is interpreted as a sign of high quality.

Price Skimming and Buyer Perception and Price

When a new product enters the market, such as a new form of home technology, the price can affect buyer perception. Often, items priced towards the higher end suggest quality and exclusivity. This may help attract early adopters who are willing to spend more for a product and can also provide useful word-of-mouth marketing campaigns.

Price Skimming Limits

Generally, the price skimming model is best used for a short period of time – allowing the early adopter market to become saturated, but not alienating price-conscious buyers over the long term. Additionally, buyers may turn to cheaper competitors if a price reduction comes about too late, leading to lost sales and most likely lost revenue.

Price skimming may also not be as effective for any competitor follow-up products. Since the initial market of early adopters has been tapped, other buyers may not purchase a competing product at a higher price without significant product improvements over the original.

RELATED TERMS
  1. Jitter

    Jitter is an anti-skimming technique that distorts the readout ...
  2. Modigliani-Miller Theorem - M&M

    The Modigliani-Miller theorem states that a firm's value is based ...
  3. Buyer's Call

    A buyer's call is an agreement whereby a commodity purchase occurs ...
  4. Buyer's Credit

    Buyer's Credit is a loan that a bank or other financial institution ...
  5. Dutch Book Theorem

    Dutch Book Theorem is a type of probability theory that postulates ...
  6. Market Penetration

    Market penetration is a measure of the amount of sales or adoption ...
Related Articles
  1. Small Business

    7 steps to selling your small business

    Selling your small business is often a complex venture. These seven considerations can help you build a solid plan for profit and lead to success.
  2. Investing

    What the Fear Index's Low Level Means

    How much attention should investors pay to the historically low levels of the so-called fear index?
  3. Investing

    Housing deals that fall through

    Find why buyers back out, and what you can do if you're left holding the bag.
  4. Investing

    6 Bad Investment Habits That Are Draining Your Portfolio

    Falling victim to certain bad investment habits can spell disaster for your portfolio.
  5. Small Business

    5 Steps To A Small Business Marketing Plan

    Here are some tips for marketing your small business.
  6. Investing

    Selling Your House? Avoid These Mistakes

    Don't put the sale of your home at risk by committing one of these dirty deeds.
  7. Personal Finance

    6 Tips For Selling Your Home Fast

    Find out what you can do to stand out from the competition and make your home an easy sell.
  8. Managing Wealth

    3 Reasons Million-Dollar Homes Are in a Slump

    Now might be a good time to consider buying a luxury home, what with prices down, inventory up and fewer foreign buyers in the market.
  9. Investing

    Why You Can't Influence Gas Prices

    Neither big oil companies nor consumers are responsible for oil prices: it's basic economics. Find out why you can't influence the price of gas.
RELATED FAQS
  1. Why is product differentiation important in today's financial climate?

    Learn the importance of product differentiation and how businesses today are utilizing it to set themselves apart from the ... Read Answer >>
  2. How can a company improve its net margin?

    Learn about what businesses can do to increase their net margin, including ways to increase sales revenue and decrease operational ... Read Answer >>
Trading Center