Market skimming

Price skimming is a pricing strategy in which a company starts by charging the highest price that customers will pay. Over time, the company lowers the price to reach different types of customers. Initially, the high price targets early adopters willing to pay more for a new product. As these early customers are satisfied and competitors enter the market, the company reduces prices to attract more price-sensitive consumers.

“Price skimming” originates from “skimming” layers, like removing successive layers of cream from the top of milk. Unlike penetration pricing, which starts with a low price to attract a large customer base quickly, price skimming leverages initial high prices to maximize early profits before adjusting to more competitive levels

This approach contrasts with the penetration pricing model, which focuses on releasing a lower-priced product to grab as much market share as possible. This technique is generally better suited for lower-cost items, such as basic household supplies, where price may be a driving factor in most customers’ production selections.

Firms often use price skimming to recover development costs and in situations where:

• Enough prospective customers are willing to buy the product at a high price.
• The high price doesn’t attract competitors.
• Lowering the price would have only a minor effect on increasing sales volume and reducing unit costs.
• The high price is interpreted as a sign of high quality.

For new products, like innovative home technology, a high initial price can signal quality and exclusivity. This attracts early adopters willing to spend more and can generate valuable word-of-mouth marketing.