Price Skimming Strategy in 2024: Examples, Pros, and Cons

“Our goal has never been to sell a cheap phone,” said Apple CEO Tim Cook, illustrating the company’s approach to iPhone pricing. From the very beginning, Apple positioned its smartphone as a premium product. They understood that those who seek the best are willing to pay more, and they continue to employ a price skimming strategy to this day. This pricing strategy allows Apple to maximize profit from early adopters of each new iPhone lineup, quickly reaching the breakeven point. Upon the release of new models, they reduce the prices of previous iPhone models, thereby increasing sales volumes.

In this article, we explore key aspects of price skimming — a pricing strategy used by Apple and other market leaders for innovative products. You’ll learn about the advantages and disadvantages of this strategy as well as several examples of its application in various business sectors.

Contents:

What Is Price Skimming?

How Does Price Skimming Work?

Examples of a Price Skimming Strategy

When Is Price Skimming Used?

What Are the Advantages of Price Skimming?

What Are the Disadvantages of Price Skimming?

What Is Price Skimming?

Price skimming (or high pricing) is a pricing strategy where a company initially sets a high price for a product and then gradually reduces it. 

This strategy is particularly effective in the early stages of the product life cycle. The extent to which a company can set a high price for its products depends on factors such as market size, market segment, number of potential competitors, and price elasticity of demand. 

Over time, as a product becomes less novel and more accessible (and as alternatives emerge), a business employing a price skimming strategy lowers the product’s price.

How Does Price Skimming Work?

The term “cream skimming,” which is often used synonymously with “price skimming,” suggests that a company is “skimming off” the most profitable portion of the market, analogous to skimming cream off milk. A price skimming strategy allows a company to maximize profit before gradually lowering prices to attract more price-sensitive customers.

Before reducing prices, companies typically conduct competitor price intelligence and assortment analysis within the market niche. This helps determine the most suitable pricing strategy to maximize profits while maintaining competitiveness, ensuring the product remains attractive to a broad range of consumers when compared to other available options.

Price skimming is typically employed by manufacturers of innovative products with unique features and by brands targeting trend-conscious consumers. It is often used in industries such as electronics, software, pharmaceuticals, and luxury retail.

Examples of Price Skimming Strategies

Tesla in the electric car market

In 2012, Tesla Motors released its first sedan, the Tesla Model S, which sparked a revolution in the electric car market. The Tesla Model S was the first electric car that could go more than 186 miles on a single charge. The manufacturer positioned it as a luxury car, with a corresponding price tag of $70,000. Tesla targeted an audience that could afford to pay a lot for a quality car. The decision to set a high price for its first mass-market model helped the company quickly recoup research and development costs.

With its reputation established as an innovator, Tesla began to penetrate the mass market by creating attractive electric cars. Currently, the cheapest Tesla car, the Model 3 sedan, is sold in the US for around $39,000.

In this example, we see how a price skimming strategy works within the framework of an entire brand rather than a specific product. It was this approach that helped Tesla successfully enter the automotive market and subsequently capture the hearts of millions.

Price skimming in fashion

Louis Vuitton, one of the most expensive fashion brands in the world, is well-known for its reluctance to offer discounts, exemplifying premium price positioning. However, not all luxury brands follow this path. For example, Prada and Gucci employ a price skimming strategy while still allowing their customers to purchase their products at reduced prices annually.

Mass-market retailers in fast fashion also employ a price skimming strategy in combination with other pricing strategies. For instance, Zara Clothing utilizes competitive pricing, penetration pricing, cost-based pricing, and price skimming. Compared to competitors, Zara sets relatively higher initial prices for new clothing models, as the brand’s target audience has greater purchasing power than, for example, H&M’s audience.

How pharmaceutical manufacturers use price skimming

When pharmaceutical companies enter the market with a new medication, especially one protected by a patent, they also employ a price skimming strategy. Price skimming helps pharmaceutical companies cover significant costs for R&D and production, as well as advertising expenses associated with launching new products on the market.

If a product is patent-protected, as the patent expiration date approaches, the manufacturer gradually lowers prices to gain the strongest possible position before competitors enter the market.

Prices can be very high when a medication is first released, as doctors, patients, and insurers lack alternatives and medication is typically not seen as a discretionary expense. However, with the market entry of generic equivalents, prices decrease.

Why Xboxes are so expensive

Manufacturers of gaming consoles typically employ competitive pricing strategies combined with pricing skimming. For example, the initial cost of the Xbox Series X may seem high because Microsoft sets the selling price of a newly released console not only to cover production costs but also to generate profit. However, the prices of gaming consoles tend to decrease over time as manufacturing processes become more efficient and economies of scale are realized.

These examples demonstrate how a price skimming strategy can be successful in different industries and for different types of products and services.

When Is Price Skimming Used?

A price skimming (or high pricing) strategy is applied when:

• The goal of the high initial price is to reflect the product’s quality and uniqueness.
• There is a consistently high level of demand, and the majority of buyers are not price sensitive.
• The difference in potential revenue from selling a larger quantity of goods at a lower price compared to selling a smaller quantity of goods at a higher price is negligible.
• Competition is limited or absent, and the product possesses qualities that distinguish it from alternatives.
• Demand for the new product exceeds supply.

What Are the Advantages of Price Skimming?

A price skimming strategy has several significant advantages:

• High profit margins: Setting a high initial price allows the company to achieve high profit margins at early stages of the product life cycle.
• Attracts early adopters: A high initial price can help attract early adopters who are willing to pay more for an innovative new product.
• Strengthens the brand image: Setting a high price can help position the product as premium and contribute to enhancing overall brand value.
• Minimizes risk: A high price allows the company to capture significant profit before competitors introduce alternatives, thereby mitigating risk.

What Are the Disadvantages of Price Skimming?

Despite its advantages, price skimming also has some drawbacks:

• Increased competitive threat: A high initial price may attract the attention of competitors, who may introduce alternative products at more attractive prices. This can lead to rapid price reductions in the market, decreasing profitability.
• Risk of negative customer reactions: When Apple decided to lower the price of the iPhone ten weeks after its launch, Steve Jobs received hundreds of complaint emails. He had to personally apologize and refund money to early adopters.