🚀 Phase 1: High Initial Price
The product is launched at a premium price point, targeting customers who:
- Value being first to own new technology
- Are less sensitive to price
- See status value in owning the latest products
Marketing Mix » Price Component (Market Skimming)
What you'll learn this session
Study time: 30 minutes
- What market skimming pricing strategy is and how it works
- When market skimming is most effective to use
- Advantages and disadvantages of market skimming
- Real-world examples of successful market skimming
- How to evaluate if market skimming is right for a product
- How market skimming fits within the broader marketing mix
🔒 Unlock Full Course Content
Sign up to access the complete lesson and track your progress!
Unlock This CourseIntroduction to Market Skimming
When Apple releases a new iPhone, have you noticed how it's always really expensive at first? Then, a year or so later, the price drops. This is a classic example of market skimming - a pricing strategy that's commonly used for exciting new products.
Key Definitions:
- Market Skimming: Setting a high initial price for a new product and then gradually reducing it over time to attract different customer segments.
- Price Elasticity: How sensitive customer demand is to changes in price.
- Early Adopters: Customers who are willing to pay premium prices to be the first to own new products.
Quick Fact – The Origin of "Skimming"
The term "skimming" comes from the idea of skimming the cream (the most profitable customers) from the top of the milk. Companies first target customers who are willing to pay more, then work their way down to more price-sensitive segments.
How Market Skimming Works
Market skimming involves a simple but effective approach:
📏 Phase 2: Gradual Price Reduction
As the initial demand slows down, prices are gradually lowered to:
- Attract more price-conscious customers
- Extend the product life cycle
- Maximise total revenue across different market segments
When to Use Market Skimming
Market skimming isn't suitable for every product or situation. It works best under specific conditions:
💡 Innovative Products
Products that offer something genuinely new or significantly better than existing alternatives.
💎 Strong Brand Value
Brands with loyal customers who trust the quality and are willing to pay premium prices.
🔒 Limited Competition
Markets where competitors cannot quickly produce similar products at lower prices.
Other important conditions include:
- Inelastic demand among early adopters (price changes don't greatly affect demand)
- High production costs that will decrease over time
- Clear market segmentation between price-sensitive and non-price-sensitive customers
Advantages of Market Skimming
Using a skimming strategy can benefit businesses in several ways:
💰 Financial Benefits
- Quick Recovery of Costs: Higher initial prices help recover research and development costs faster
- Higher Profit Margins: Premium pricing creates better margins in the early stages
- Controlled Growth: Helps manage production capacity as demand grows gradually
📝 Marketing Benefits
- Perceived Quality: High prices often signal high quality to consumers
- Prestige Value: Creates exclusivity that appeals to status-conscious customers
- Price Flexibility: Easier to lower prices later than to raise them
Disadvantages of Market Skimming
While market skimming has many advantages, it also comes with significant risks:
- Attracts Competition: High profit margins can quickly attract competitors who may offer similar products at lower prices
- Limited Market Share: High prices restrict sales to a smaller segment of potential customers
- Potential Customer Resentment: Later customers may feel cheated when they see prices drop
- Short-term Strategy: Often not sustainable in the long run as markets mature
- Requires Continuous Innovation: Companies must keep improving products to justify premium pricing
Case Study Focus: Sony PlayStation 5
When Sony launched the PlayStation 5 in 2020, they used a market skimming strategy. The initial price was £449 for the standard edition, targeting gaming enthusiasts who wanted the latest technology regardless of cost. As production scaled up and component costs decreased, Sony was able to offer periodic discounts and bundle deals to attract more price-sensitive gamers. This approach allowed Sony to maximise profits from early adopters while gradually expanding their market reach.
Market Skimming vs. Penetration Pricing
To better understand market skimming, it helps to compare it with its opposite strategy - penetration pricing:
📈 Market Skimming
- Starts with high prices that gradually decrease
- Targets quality-focused customers first
- Prioritises profit margins over sales volume
- Works best for unique or innovative products
- Example: New Apple products
📉 Penetration Pricing
- Starts with low prices to capture market share
- Targets price-sensitive customers
- Prioritises sales volume over profit margins
- Works best for competitive markets
- Example: Streaming services like Netflix
Real-World Examples of Market Skimming
📱 Technology
Samsung Galaxy Fold launched at nearly £2,000, targeting tech enthusiasts before later models became more affordable.
👟 Fashion
Designer Clothing often releases at premium prices in exclusive stores before becoming available in outlet stores at lower prices.
🎥 Entertainment
Cinema Releases charge premium prices for initial theatrical release before moving to streaming platforms at lower costs.
Implementing a Market Skimming Strategy
If you're considering using market skimming for your product, follow these steps:
- Market Research: Identify if there are enough customers willing to pay premium prices
- Competitor Analysis: Determine if your product offers unique benefits that competitors can't easily copy
- Cost Calculation: Ensure high initial prices will cover development costs and provide profit
- Price Planning: Create a timeline for when and how much to reduce prices
- Marketing Communication: Emphasise unique features and benefits to justify the premium price
- Monitor and Adapt: Track sales and competitor responses, adjusting your strategy as needed
Exam Tip!
In your exam, remember to evaluate market skimming from different perspectives. Consider how it might benefit a business financially while potentially limiting market share. Always link your answer to the specific context given in the question - market skimming works differently for a luxury watch compared to a new type of breakfast cereal!
Market Skimming in the Marketing Mix
Price is just one element of the marketing mix (the 4Ps: Product, Price, Place, Promotion). For market skimming to work effectively, it needs to align with the other elements:
🎁 Product
Must be innovative, high-quality and offer clear benefits over alternatives to justify the premium price. The product should appeal to early adopters who value innovation and exclusivity.
📸 Promotion
Should emphasise unique features, quality and status benefits. Marketing needs to create desire and justify the high price by highlighting the product's superior value.
🏠 Place
Distribution should initially be selective, often through premium retailers or direct channels that enhance the exclusive image of the product.
💲 Price
The skimming strategy itself, with planned price reductions timed to maximise revenue from different customer segments as the market evolves.
Summary: Key Points to Remember
- Market skimming involves setting high initial prices and gradually lowering them
- It works best for innovative products with limited competition
- Advantages include quick cost recovery and high profit margins
- Disadvantages include limited market share and potential competitor attraction
- The strategy must align with the other elements of the marketing mix
- Successful examples include technology products, fashion items and entertainment
By understanding when and how to use market skimming, businesses can maximise profits while extending their product's life cycle across different market segments.