What Is Price Skimming — and When Should You Actually Use It?
What is price skimming? Definition, examples, and pros and cons
If you’re launching a new product, how you set that first price can determine how much revenue you can capture, and how long you can stay ahead of your competition.
Price skimming is one strategy you might consider, and this post will cover everything you need to know.
Key takeaways
- Price skimming is launching a new product at a high price, then steadily lowering the price as competitors emerge.
- The tactic is best for new, innovative products. With less competition, you have more pricing freedom.
- Price skimming is the opposite of price penetration, which uses low launch prices to win market share fast.
- You don’t want to hold the high price for too long to avoid losing customers to cheaper rivals.
What is price skimming?
Price skimming is a pricing strategy where a business launches a new product at the highest price that the market will bear, then gradually lowers it over time. It's usually used when a product appears first on the market with little direct competition. The goal is to maximize revenue from early adopters before the wider competition drives prices down.
This strategy is named after the idea of skimming cream off the top. Essentially, capturing the most profitable segment of buyers first, then moving down to the next tier of customers.
A good example is Apple; the company set a high price point when the iPhone first dropped.
How does price skimming work?
Price skimming follows a predictable cycle: launch at a premium price, capture early adopters, watch competition enter, reduce the price, reach a broader audience, and eventually stabilize at a competitive market rate.
Each price reduction gives you a whole new set of buyers who were interested but not willing to pay the higher price.
Take the 3D printer as an example. When the first SLA printer launched in 1987, nothing compared, so its creator charged $300,000. Early buyers paid a premium, but as competitors entered the market and materials became cheaper, prices fell significantly. Now, a 3D printer costs under $200.
By price skimming, brands have been able to:
- Increased profits by capturing full willingness-to-pay from early adopters before price pressure from competitors sets in.
- Established authority in markets with a premium price that signals quality and innovation.
- Attract new audiences because as the price drops, the product becomes accessible to customer segments that weren't reachable at launch.
When to use price skimming — and when not to
When should you use price skimming?
For the best possible chance of success in your price-skimming strategy, consider the following points:
- You have produced a new, innovative product.
- You have identified an uncrowded market.
- People are willing to pay a higher price.
- You have an inelastic demand curve.
Treat the points above as a checklist. If you can tick each point, your product might be a prime candidate for price skimming.
When shouldn’t you use price skimming?
Price skimming isn’t for everyone. Just because you think that your product is revolutionary doesn’t mean the consumer will think the same thing.
- It’s a great one-time strategy, but not as effective for follow up products.
- Price skimming also shouldn’t be a long-term strategy.
When price skimming won't work
If any of the following ring true, the tactic just won’t work:
- Elastic demand.
- Crowded market.
- Low brand authority.
- Commodity product.
Price skimming vs. penetration pricing — what’s the difference?
| Price skimming | Penetration pricing | |
|---|---|---|
| Pricing | Sets a high initial price to maximize short-term earnings. | Sets a lower price to help establish a following for a new product. |
| Audience | Targets a smaller number of customers looking to invest in the latest innovation. | Targets a broad audience of customers by setting a competitive price tag. |
| Marketplace | Focuses on new markets where an organization has yet to establish a foothold. | Appropriate for markets where it is harder to break through. |
| Risk | Customers might abandon a brand when they increase their pricing. | Customers might leave a brand due to pricing mistakes. |
How to implement a price skimming strategy
1. Confirm your product qualifies.
2. Set your initial price.
3. Define your price reduction schedule in advance.
4. Build your quoting and pricing infrastructure.
5. Monitor and adjust.
Advantages and disadvantages of price skimming
| Advantages of price skimming | Disadvantages of price skimming |
|---|---|
| The chance to set the rules in a new market. | An ineffective tactic in crowded markets. |
| Generate demand with a “must-have” product. | Competitors will attempt to undercut you and steal your audience. |
| The ability to generate high amounts of revenue. | Customers might think you’re taking advantage of them due to high pricing. |
Price skimming examples
- SLA Printer: The first 3D printer was released in 1987 at a price of $300,000.
- Sony PlayStation 5: Launched at $499 during a global chip shortage.
- Nike Sportswear: Air Jordan launches at $180.
- Apple Vision Pro: Released at $3,499 in 2024.
- Apple iPhone: Launched in 2007 at $499/$599.
Frequently asked questions
What is price skimming? Price skimming is a pricing strategy where a business launches a product at a high price, then gradually lowers it over time.
How is price skimming different from penetration pricing? Price skimming starts high and then lowers, whereas penetration pricing starts low and increases.
What are the main advantages of price skimming? It can recover development and launch costs quickly, signal premium quality, and allow you to segment buyers based on their willingness to pay over time.
When does price skimming not work? It doesn’t work when there's too much competition at launch, when demand is price-sensitive, or when the product isn't different enough from others on the market to justify a premium price.