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Mastering the Art of Price Skimming for Profit Maximization

by
in
Maciej Wilczyński
Managing Partner, Founder Valueships
June 16, 2023
pricing

Just as the right balance of espresso and steamed milk is crucial to a great latte, a well-crafted pricing policy is key to business success. One such strategy is price skimming, a method that, when implemented effectively, can significantly boost profit margins.

Much like the gradual blending of flavors in a latte, price skimming involves setting a high starting price and then gradually reducing it over time. Let's delve deeper – and see if that can give you that caffeine kick. 

What is price skimming?

Price skimming is a strategy where a company sets an initially high price for a new product or service and gradually lower price over time. This approach is often used to capitalize on early adopters and maximize profits before facing competition or market saturation.

Skimming pricing is the opposite of penetration pricing (here company sets a relatively low price in order to gain a large market share quickly). 

What are the benefits of price skimming?

Price skimming works quite simply, and if it's done properly, you might enter the market quickly. You can use price skimming model on a daily basis since it can be beneficial to your business. See why below.

💯 Maximizing profit margins

Price skimming allows businesses to maximize their profit margins by initially setting the highest price. This plan is particularly effective when a service or product is new to the market, unique, or has a perceived value that justifies the big price. 

Ultimately, lowering prices might yield higher returns and sustain profitability in the long run. Does it sound like a skimming pricing strategy is perfect for your business?

💰 Recovery of research and development costs

Companies often invest heavily in research and development (R&D) for new products. So, the practice of price skimming can also help recover these costs quickly, as the high price helps to offset the investment made in R&D. 

As the price gradually lowers over time, it attracts a wider customer base. Add to this word-of-mouth marketing, and you will see the results you want.

🏆 Creating a premium brand image

Price skimming might help in establishing a premium brand image. Prices that are high are often associated with excellent quality, and customers may perceive the product as being superior due to its high cost. 

Therefore, starting with a higher price for a new product can be beneficial. Use this strategy to position the product as a premium offering in the market. 

👩‍🏭 Targeting different market segments over time

As the price changes and gradually decreases, different segments of the market can be targeted. This allows the company to cater to customers who are prepared to pay more for being early adopters, as well as those who are more price-sensitive and wish to see the price drop.

This approach helps align the product with the needs and expectations of different customer segments, ensuring that the price point of the skimming strategy remains acceptable. 

When should you use a price-skimming strategy?

#1 Innovative product

Price skimming is most effective when the offering is innovative or unique, with few or no direct competitors in the market. This allows the company to set a high starter price without worrying about competition.

#2 High demand

If there is strong demand for the product and customers are ready to pay a greater price, then a product pricing strategy can be beneficial. This is often the case with new technology or luxury goods.

#3 High production costs

If the cost of producing the product is considerable, a skimming strategy can help recover these costs quickly. This is particularly relevant for products that require significant development and research investment.

#4 Brand image

If the company wants to establish a premium brand image, price skimming can be an effective strategy. Expensive prices can create an impression of superior quality and exclusivity. And when the price drops, it can attract a wider user base.

#5 Price insensitivity

Price skimming is often used when the target customers are less sensitive to price and more focused on the value or benefits that the product provides. This is often the case with early adopters who are willing to pay a higher price to get their hands on the product before others.

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How to implement price skimming effectively?

Product uniqueness - ensure that your offering is unique, innovative, or superior in quality. Thanks to this, you will be able to explain the high original price and attract early adopters. When skimming pricing begins, lower the price over time to attract a larger customer base.

Market research - conduct thorough market research to understand your target audience's willingness to pay, their price sensitivity, and their perception of your product's value. This will help you determine the optimal pricing plan and identify potential customer segments for price discrimination.

Competitor analysis - keep an eye on your competitors. If your product is not significantly different or superior, customers might opt for cheaper alternatives. Differentiate your product through unique features and value propositions to maintain a competitive edge so the company can rely on a skimming model.

Cost analysis - understand your cost structure. The initial starter price should cover your costs and provide a reasonable profit margin. Analyze the breakeven point and determine when the price of the product should be lowered to maximize profitability.

Pricing structure - plan your price structure in advance. Decide how long you will maintain the initial original price and when and by how much you will reduce the price. This gradual reduction will create a perception of value and incentivize customers to purchase as the price goes down.

Marketing and promotion - invest in marketing and promotion to create awareness and hype around your product. Highlight the unique features and benefits of your product that justify its hefty price. Showcase successful price skimming examples to demonstrate the value customers can expect.

Quality assurance - ensure that your product delivers on its promises. A significant price comes with high customer expectations. If the product fails to meet these expectations, it could harm your brand reputation. Positive customer experiences will support long-term success.

Customer service - provide excellent customer service. Customers paying a premium price will expect premium service. This includes after-sales service, handling complaints effectively, and ensuring customer satisfaction.

Can price skimming be applied to SaaS?

Have you ever heard that price skimming is not a viable pricing strategy for SaaS businesses? Well, that’s not true. Price skimming can indeed apply to Software as a Service (SaaS) businesses, particularly those that offer unique or highly innovative solutions. 

When a young SaaS company introduces a new software product that is first-of-its-kind in the market, it can set a high primary price for early adopters who are eager to pay a lot for access to the latest technology. 

This strategy allows every company to maximize profits and recover development costs quickly. Over time, as the novelty wears off and competition increases, the company can gradually lower the price to attract more price-sensitive customers. 

In the end, when considering the best pricing strategy for your business, SaaS companies should look at some examples of price skimming and penetration pricing while considering dynamic pricing strategies that align with their business objectives.

It's also important to note that successful price skimming in the SaaS industry requires some key components. 

Here they are:

#1 Strong value proposition

Successful price skimming and lower price point in the SaaS industry relies on a strong value proposition. Dynamic pricing and periodic price drops alone may not be sufficient to drive customer adoption. 

Companies need to ensure that their SaaS offerings deliver a compelling value proposition, such as innovative features, superior performance, or time-saving capabilities. This creates a loyal customer base who are willing to pay the initial premium price and encourages new customers to buy the product, maximizing the effectiveness of the price skimming strategy.

#2 Excellent customer service

Another key requirement for successful price skimming is excellent customer service. Customers who are paying a high initial price for your software will expect high-quality service in return. 

This includes:

  • responsive support, 
  • effective problem resolution, 
  • and a customer-centric approach. 

Providing excellent customer service can enhance customer satisfaction, improve retention, and support the high-price strategy.

#3 Standout features, benefits, or technological advancement

Finally, to effectively implement price skimming, your SaaS product should genuinely stand out in terms of its features, benefits, or technological advancement. It should offer something unique or superior that sets it apart from other solutions in the market. This could be a unique feature, superior functionality, or cutting-edge technology. 

If customers are willing to pay more for the most innovative or best solution, this distinctiveness can compensate for the highest initial price.

Is price skimming the best pricing model you can take? 

It depends. Your pricing strategy needs to be aligned with your overall product positioning, which is coming directly from your business strategy. It’s a cascading thing. It’s fine to be the cheapest on the market (cost leadership) to penetrate the market or other way, to be the most expensive and sophisticated tool. However, in technology, which outdates really fast, skimming sounds like a natural way to go.
I recommend though is to not use skimming for the whole product, but use it for new product features: launch it as an expensive add-on, see how it adopts; once it gets over 10-15% adoption rate, try moving it to the premium packaging to reach 30-40%; then, if it gets popular and over 50% of the customers use it, then definitely goes to your core, freemum eventually. It’s a full cycle of adoption, which is directly based on a price skimming strategy.

Maciej Wilczynski, CEO Valueships

Adjust your price skimming strategies

Look for optimizing business strategies, pricing models, and value understanding when it comes to price skimming.

Here's how:

👉 Strategy consulting

Collaborate with someone who has a proven track record of helping companies optimize their business models. Look for someone to provide valuable insights and guidance on when and how to implement a price skimming model, ensuring it aligns with your overall business objectives.

👉 Pricing consulting

Pricing is a key element of growth, and getting it right can significantly increase your revenue. Solid pricing consulting services are designed to help you design and implement a strategy that maximizes your profits.

👉 Value-selling

Focus onunearthing new value in their products and services. Understand and communicate the unique value of your product, which is crucial for establishing a primary price in a price-skimming strategy.

👉 Advanced analytics & research

Data analytics is essential for creating effective pricing plans. Work with data analysis experts who can help you leverage your data to make informed decisions about your price skimming plans.

Conclusion

All examples of price skimming work straightforwardly. You just need to understand this model, prepare a strategy, and nothing will stop you! There can be both advantages and disadvantages of price skimming, but with a thorough approach, you can boost your market share, target different segments, create a premium brand image, or even recover costs. 

Get all advantages of price skimming and improve wake up your business so that you will be better than the competition. Get help from Valueships and develop with us.

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Maciej Wilczyński
Managing Partner, Founder Valueships

Expert in B2B pricing, monetization and value-based selling strategies. Over the past year, he has completed over 40 consulting projects in Europe. Prior to founding Valueships, he worked at McKinsey & Company, mainly in the TelCo, software, and banking industries. He completed his doctorate in pricing in SaaS start-ups at the University of Economics in Wrocław, where he also lectures.

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Maciej Wilczyński
Managing Partner, Founder Valueships

Expert in B2B pricing, monetization and value-based selling strategies. Over the past year, he has completed over 40 consulting projects in Europe. Prior to founding Valueships, he worked at McKinsey & Company, mainly in the TelCo, software, and banking industries. He completed his doctorate in pricing in SaaS start-ups at the University of Economics in Wrocław, where he also lectures.