Price skimming → setting a high initial price when a new product is launched → targeting customers who are willing to pay a premium → gradually reducing the price as the product moves through its life cycle
→ The strategy is commonly used for innovative, technologically advanced or strongly differentiated products where customers perceive high value.
Objectives of Price Skimming
→ Maximise profit from early customers
→ high initial price → high profit margin per unit → business earns substantial profit from customers willing to pay more
→ Recover research and development costs quickly
→ high price → greater contribution per unit → helps recover high development and launch costs
→ Create a premium image
→ high price → can signal high quality, exclusivity or advanced technology
→ Segment the market
→ initially target customers with high willingness to pay → later reduce the price → attract more price-sensitive customers
→ Reduce demand pressure at launch
→ high price → limits initial demand → gives the business time to increase production and distribution gradually
How Price Skimming Works
→ New product launched → high initial price → customers with high willingness to pay purchase first
→ High profit per unit → helps recover development and launch costs
→ Competition increases → price gradually reduced → more price-sensitive customers enter the market
→ Price reductions continue → product becomes accessible to a wider market
Example
→ A technology business launches a new smartphone with innovative features
→ Initial price → ₹1,20,000
→ Customers who strongly value the new technology and are willing to pay more purchase first
→ After competitors introduce similar products → the business reduces the price → attracting a larger customer segment
→ Example: Premium smartphones often use this approach → new flagship models are introduced at high prices before discounts and price reductions appear later.
When Price Skimming Is Most Useful
→ Highly innovative products
→ customers may be willing to pay a premium because there are few close substitutes
→ Strong brand image
→ established brands can charge higher prices because customers perceive additional value
→ Inelastic demand among target customers
→ customers who strongly value the product are less responsive to a high price
→ High research and development costs
→ high contribution per unit → helps the business recover investment more quickly
→ Limited initial competition
→ few competitors → gives the business greater control over its initial price
Analysis
→ high initial price → high contribution per unit → rapid recovery of development costs → improves cash flow and potentially increases early profits
→ premium pricing → creates an exclusive image → strengthens perceived product quality → may increase brand value
→ gradual price reductions → attract increasingly price-sensitive customers → expand the market → extend the product’s sales potential
Evaluation
→ Advantage: high profit margins at launch → particularly useful for products with high development costs
→ Advantage: creates a premium image → can strengthen brand positioning and perceived quality
→ Limitation: high price may attract competitors → other businesses may enter the market with cheaper alternatives
→ Limitation: limited initial sales volume → high price excludes price-sensitive customers → reducing the size of the initial market
→ Risk: customers may delay purchasing → expecting the price to fall later
→ Price skimming is most effective when the product is innovative, has a strong USP, faces limited competition and has customers willing to pay a premium
→ Overall → price skimming can maximise early profits and recover development costs quickly → but it becomes less effective when competitors offer close substitutes or customers are highly price-sensitive.