When to Use Price Skimming Or Market Skimming As a Pricing Strategy
Your pricing strategy is one of many of marketing strategies that you will use in your business and it’s very important to get this strategy right because the right price strategy (along with the right product, and a strong marketing, sales and business plan) will earn your business revenues and market share. A number of businesses, usually leaders in their industry, use price skimming or market skimming as a pricing strategy.
An example of price or market skimming can be seen in the computer industry, where technology sets up the environment for this price strategy. A computer manufacturer comes out with a new laptop every 8 to 10 months. The older, unsold models move down in price (they are in their mature or declining stage of their very short life-cycle), while the new model laptop (with newer features and benefits) is in the introductory phase and is able to command a higher price. The computer manufacturer is skimming price (also known as skimming the market) at various life cycle levels (introduction, growth, maturity and decline) and gaining the maximum profit through the maximum price that each level will support.
This strategy will work if the market is large enough, if there are enough buyers, if there is high product or service demand, and if the company has a good (and low) cost structure. In the computer industry example, demand for laptops is high, there are many buyers and recurring buyers, and the industry has a low cost structure that is technology enabled.
The challenge for businesses with this strategy will come from having too many competitors in the market. If there are too many competitors, each with a full line of products in the varying stages of the product life cycle, buyers will find it difficult to make decisions based on quality or service or value for the price. Inevitably if there is too much competition for the same buyer, the buyer will look for the laptop with the most features at the lowest price. And if you are not the company with the lowest price and the most features, you will look like you have been overcharging and your reputation and brand identity, as well as sales, may be hurt by that perception.
Before you select this, or any, pricing strategy, make sure that you clearly understand your buyer’s behavior and decision making criteria and make sure that you have a good idea of how your competitors will act or react. Understanding your market is the first step in building a strong pricing strategy. The next step is to ensure that you test your pricing strategy on a regular basis to ensure that the decision criteria you used in picking your strategy is still valid over time and with changing market conditions.