Market Skimming Pricing

Market skimming pricing is a pricing strategy where a business initially launches a new product at a high price, targeting customers who are willing to pay a premium for early access or exclusivity. Over time, as sales begin to slow or competitors enter the market, the business gradually reduces the price to attract a wider customer base.

Key Points

• Market skimming pricing begins with setting a high initial price for a new product or service. This price is often above what competitors are offering for similar products.
• The strategy focuses on attracting early adopters and customers who are willing to pay a premium to be among the first to own or experience the product. These customers are typically less price-sensitive.
• By initially charging a high price, the business "skims the cream" from the top of the market, maximising profit margins and generating significant revenue.
• As market demand evolves, sales may slow down. To continue attracting a broader customer base and maintaining competitiveness, the business gradually lowers the price. This can make the product more accessible to a wider audience.
• Market skimming pricing is most effective when there are limited or no direct competitors in the market. This allows the business to set high initial prices without immediate competitive pressure.

Example

A tech company introduces a cutting-edge smartphone with advanced features. To target tech enthusiasts and early adopters, they launch the product at a premium price well above the cost of production. Over the following months, as competitors release similar devices and market demand stabilises, the company reduces the smartphone's price to attract a broader customer base.

In summary, market skimming pricing involves initially setting a high price for a new product, targeting early adopters who are willing to pay a premium. Over time, the price is gradually lowered to attract a wider range of customers.