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Price Skimming, Great To Generate Initial Revenue

Published on

October 31, 2023

Price Skimming, Great To Generate Initial Revenue

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Skimming is a pricing strategy where you initially set your SaaS prices higher than usual, then gradually lower them over time. The idea is to attract a smaller target market first and generate initial revenue. 

However, this strategy works best when you have planned future releases of your service, as it assumes demand will decrease over time. With each new release, you can repeat the skimming strategy to capture higher revenue from a smaller audience before expanding to a wider market.

Other SaaS pricing strategies to look into:

- Cost-plus pricing
- Value-based pricing
- Dynamic pricing
- Captive pricing
- Penetration Pricing
- Competitor based pricing
- Demand based pricing

What is price skimming?

Price skimming is a strategy used by companies to introduce new products to the market. It involves initially setting high prices and then gradually lowering them as competition increases.

This approach allows businesses to attract early customers who are willing to pay more for a new or improved product. Over time, as the business adjusts prices based on market demand, it can reach a wider audience. 

Many popular brands adopt price skimming when launching new products, knowing that early adopters are willing to pay a premium. Eventually, the prices are reduced to cater to more price-sensitive customers.

However, it's important to note that price skimming may not be suitable for every business. It is typically utilized by companies with innovative or highly sought-after products.

price skimming
The concept of price-skimming explained

The principles behind price skimming

Price skimming is a demanding pricing strategy that relies heavily on timing. To maximize profit and remain competitive in the market, businesses need to understand each stage of the price skimming cycle thoroughly. This will increase their product's chances of success, especially when other products emerge.

Implementing a price-skimming strategy implies meticulous management of your product's trajectory post-launch. The initial release period typically garners the highest level of enthusiasm from consumers. By concentrating your early efforts on appealing to upper-market segments, you can swiftly recover development costs and generate a consistent initial profit.

Furthermore, your product is less likely to face immediate direct competition. By the time competitors emerge, you will have established your reputation among the first wave of satisfied customers. This positions you to subsequently lower your prices and penetrate lower market levels.

When executed correctly, this approach effectively counters any competitors utilizing a penetration pricing strategy to nullify your advantage.

The Advantages of Price Skimming

Price skimming strategies offer benefits by enabling increased investment in research and development. In competitive market environments, companies allocate significant resources to product research, establishing a market and justifying higher prices.

The advantages of employing price skimming strategies include:

what is price skimming
The pros of price skimming

👍 Revenue is Maximized, Early On

Using price skimming tactics, companies aim to maximize early revenue by recouping investments quickly and selling products at the highest possible price. This strategy immediately boosts revenue and profit, enabling the company to expand marketing and distribution and cover research and development costs.

👍 It Creates Customer Anticipation

Price skimming, when combined with a gradual release method, can be a highly effective approach. Companies that implement price skimming anticipate a smaller market share at the beginning. 

However, as the price gradually decreases, the product becomes more affordable and alluring to customers. This creates anticipation and desire for the product, especially among those who couldn't afford it initially. It's a classic example of the "you always want what you can't have" phenomenon. With a skimming strategy, you can potentially acquire it in just a few months.

👍 Prices Can Be Adjusted Over Time

Implementing a skimming strategy offers a major advantage: the flexibility to adjust prices based on market changes. By initially setting a higher price, you can gauge buyers' price sensitivity and maximize profit by selling as much inventory as possible.

From there, you have the power to determine when and how much to reduce the price. This puts you in complete control of the pricing model, allowing you to adapt the selling price according to market conditions and buyer behavior as needed.

👍 Good For brand Image

Skimming is not a common purchasing approach. However, when used effectively, it can shape the market's perception of your brand.

Terms like innovative, futuristic, one-of-a-kind, new, revolutionary, and prestigious are often associated with products released using a price skimming model.

If you desire to cultivate this image for your brand, price skimming might be the suitable choice for your product.

The Drawbacks of Price Skimming

Price skimming, while advantageous in certain aspects, can also result in a decline in the customer base. Here are a few drawbacks to consider when implementing a price skimming strategy.

price skimming definition
The cons of price skimming

👎 Early Buyers Can get Frustrated

Some technology enthusiasts who eagerly purchase the latest gadgets or spend more than necessary might be unhappy or even angry when they see the price of their recent purchase drop by 20% overnight. 

However, this practice is not a secret in many industries, including the tech industry. Early adopters, despite potential annoyance at price drops, typically understand the risks and are willing to pay a premium to be among the first to have the product.

👎 It Becomes Expected

If you frequently use the skimming strategy, it might undermine the intended purpose of pricing. This is because potential buyers may opt to wait for a price decrease, which can negatively impact your rollout strategy and revenue during the initial pricing phase. 

Therefore, it is advisable to use price skimming sparingly, especially if you expect buyers to react in this manner.

👎 It’s Not Sustainable Long-Term

The skim pricing technique can boost a company's profit margins initially, but its effectiveness is limited. As the market becomes more competitive, maintaining high price tags becomes challenging.

This can result in reduced sales and a loss of customers if the business fails to justify the long-term higher prices.

When to Use a Price Skimming Strategy

Knowing when to implement a price skimming strategy is crucial for businesses. While it can contribute to the success of new products, it may not be suitable for everyone.

It's important to understand that price skimming is a short-term approach and should not be relied upon for long-term profitability or sustainability.

There are several factors to consider before adopting a price skimming strategy:

  • Market adaptability: Price skimming requires the ability to quickly adjust product prices to stay competitive. If a business cannot afford to lower prices as needed, this strategy will not be effective.
  • Justification of higher pricing: The product must offer something valuable, such as high quality, exclusivity, or uniqueness, to justify the higher price. Otherwise, customers may not be willing to make a purchase.
  • Established brand reputation: Brands that utilize price skimming should already have an established image in the market. As customers become more aware of this strategy, having a trusted and loyal customer base becomes essential.

By carefully considering these factors, businesses can determine whether price skimming is the right pricing strategy for their specific circumstances.

Price skimming in SaaS

Price skimming is commonly observed in the consumer electronics industry, with limited success in the SaaS sector. One outlier is Salesforce, who managed to achieve price skimming by launching a cloud-based CRM system when it was unheard of. Initially, they set high prices and later expanded their customer base by lowering them and targeting smaller businesses.

If you have a SaaS product and are considering price skimming, proceed cautiously as improper execution can have significant negative consequences and a long recovery process. For B2B SaaS products, it is not recommended due to limited feasibility and lack of benefits for customers. 

However, for B2C SaaS offerings that are truly unique and useful, with the potential to simplify people's lives significantly, price skimming may work. Conduct thorough customer research to determine the viability.

Always evaluate if your product or idea is innovative and revolutionary enough to justify market skimming. Additionally, accurately assess the value that your SaaS product adds to customer business processes.

Price skimming versus penetration pricing

Pricing penetration refers to a strategy where a company enters a competitive market by initially offering low prices. Once the company gains enough market share, it gradually increases the price. The focus of penetration pricing is on gaining market share.

For instance, in India, Reliance Jio, a new entrant in the Telecom sector, successfully implemented this approach and became the largest telecom company in the region within just a few years. 

Another example is Android, which has gradually gained market share in the premium smartphone segment, competing with Apple.

Penetration pricing is a bottom-up strategy that involves starting with low prices to reduce adoption pressure, expanding rapidly, and then switching to higher price points once widespread adoption is achieved. This model is followed by companies like Netsuite, New Relic, and Slack in the SaaS domain. 

📚 Recommended Reading

👉 The guide to psychological pricing

Laura Ballarin

I'm Account Manager at Scalecrush. You'll find me here talking about my no-nonsense approach to content marketing.

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