Why limit your product to a specific customer segment when you can generate more revenues by having a well-thought-out Price Skimming Strategy? Learn how an in-depth analysis of your existing data can help you in formulating a Price Skimming Strategy that would increase your revenue.
What is Price Skimming?
Price skimming is a technique of charging a relatively high price during the launch of a new, innovative product and then lowering the cost over time to access different points on the demand curve. After the demands of the initial buyers are satisfied, and competitors crack the Market, the firm starts decreasing the price to attract the more price-sensitive segment of the customers. If not done properly businesses stand to lose potential revenue. Therefore it becomes important for brands to track user behavior and sales data to forecast demand trends and come up with effective price skimming strategies.
Initial Customers who are generally known as early adopters buy a high-end product at a steeper price. Eventually, prices are lowered to follow the general product demand curve and attract more price-sensitive customers. Price skimming works most effectively when the product followed an inelastic demand curve when the quantity demanded will not alter drastically in response to a change in prices. Necessary goods like gasoline and electricity are almost always inelastic, as well as luxury goods like expensive gadgets, precious stones, jewelry, etc. The chart below shows the demand curve showing demand increases when initial prices are slashed down through Price Skimming strategies:
Price Skimming Advantages
The following are the few areas where Price Skimming proves very effective:
- Higher Return on Investment – It takes a lot to bear with the initial investments, research, and development costs as well as promotional expenses. Charging more during the launch of an innovative product helps the company in the recouping purpose. Investing all of your cash resources into the development of a product or service gives you the leverage to charge higher prices during the launch to recover the bulk of your investment and hopefully fund further developments. Companies like Apple justify the initial higher rates by the technological breakthroughs they achieve and are benefited from the higher short-term profits.
- Maintaining Brand Image – Higher prices at the beginning of a product’s life cycle through price skimming helps to build a prestigious brand image and attracts consumers who are interested only in expensive items displaying the Veblen effect.
- Market segmentation – Price skimming is an effective way to segment your customer base, potentially allowing you to earn the highest possible profits from different types of customers as you reduce the price. Even if you change prices based on the demand curve and the maximum amount the customers are willing to pay, you can still obtain consumer surplus and gather more revenue.
- Beta testing new products – The status-conscious consumers who are buying your products first will act as beta testers and provide valuable feedback. Additionally, your expensive testers who love your product will do free promotion by persuading new customers to buy the product when the price drops.
Evaluate Price Skimming Strategy with Daton
Effective Price Skimming Strategies can help businesses generate more revenue. In order to implement this, it is important to analyze your customer’s behaviors and mindset and get an understanding of your demand curve. Also, it is important to determine whether your Price Skimming Strategies are proving to be beneficial over the long run. Daton will help you do just this.
Daton is a highly automated data pipeline that will extract data from various sales platforms like Zendesk, and Freshsales; customer support platforms like Freshdesk, Zendeskchat; analytics platforms like Google Analytics, and Pingdom. All these data will then be populating a data warehouse. Analyze these data and determine whether your Price Skimming strategies are valid.
Price skimming can lead to higher Returns on Investments. Track your sales and customer data efficiently and devise a proper price skimming strategy with the help of Daton. Click here for a free trial now.