What are the benefits of price skimming?
If you’re going to eventually reduce the price anyway, why not launch at that lower price tag? Well, because price skimming offers several different advantages.
1. Quick return on investment
Particularly in industries with high product development or research and development costs, companies often need to recover that investment quickly.
Starting with a higher price point allows them to recoup those costs from an eager customer base before the market becomes saturated. Then they can reinvest that money into developing future products that can increase their market share. Google Home launched at a price point of S$165 in 2016. Now, it’s available for S$135 —with even cheaper alternatives available.
Additionally, price skimming is beneficial when there’s a lack of competition at product launch. Customers can’t get less-expensive alternatives, and those who are particularly interested in your product will pay a higher price.
This is where companies reap the benefits of price skimming. They get higher profit margins from their highest-paying customers because their competitors haven’t caught up yet.
2. Perception of quality and exclusivity
While it happens subconsciously, many of us operate with the assumption that a product or service is better because it’s more expensive.
That perception may or may not be accurate, but it’s a massive piece of the price skimming puzzle—especially when it comes to early adopters. They generate natural interest in products, build hype, and instill a sense of urgency in other customers.
There are plenty of examples of how this has played out with real products. Samsung’s pre-sale of the Note 8 saw 650,000 orders in 40 countries. Customers lined up around Tesla showrooms to purchase the Model 3, despite the fact they didn’t even know what the car looked like.
These customers have less price sensitivity but want to be among the first to get their hands on a new, innovative product. They generate enthusiasm and become a source of recurring revenue as they spread the word about the product.
3. Flexible product pricing
Finally, price skimming also provides room to change pricing as the market shifts. Businesses often need to tweak their prices depending on market conditions, competition, customer feedback, and more.
With price skimming, companies start at a higher price point to capture as much revenue as possible before tailoring prices to fit the current circumstances.
This strategy gives companies a chance to determine how price-sensitive their customers are and adjust their product pricing accordingly. They test the market without leaving money on the table.