Price skimming

The opposite of entering cheap is entering dear: charge a high price to the eager few, then lower it over time. That is price skimming.

Price skimming is the strategy of setting a high initial price for a new product to capture the customers most willing to pay, then progressively lowering the price over time to reach more price-sensitive buyers. It skims successive layers of the market, from the top down, extracting the maximum each segment will pay before moving to the next.

Skimming the willing

The logic of skimming is to begin by charging the high price that the most eager, least price-sensitive customers will pay, the enthusiasts, early adopters, and those who must have the product first, capturing the high margins they offer. Once that top layer is served and exhausted, the firm lowers the price to attract the next layer of more cost-conscious customers, and continues stepping the price down over time, reaching successively larger and more price-sensitive segments. Each segment pays close to the most it would, and the firm captures more total value than a single price could.

When it works

Price skimming suits particular conditions. It works where customers differ widely in willingness to pay and some will pay a high price for novelty or to be first; where the product is genuinely new or distinctive enough to command a premium initially; where there is little immediate competition to undercut the high price; and where the firm can lower prices over time without alienating early buyers too badly. New technology products, launched high and steadily reduced as they age, are the classic case, capturing the premium from eager early adopters before reaching the mass market at lower prices.

The risks and the contrast

Skimming has its dangers. The high initial price leaves room for competitors to enter underneath it, undercutting the premium and capturing the price-sensitive market the skimmer was saving for later. Early customers who paid the high price may resent the later cuts, feeling overcharged. And a high price slows initial adoption, which can be costly where network effects or scale reward winning the market fast, the very conditions that favour the opposite strategy of penetration pricing. The choice between skimming and penetration is a fundamental one, turning on whether the firm should harvest margin from the top or capture the market from the bottom.

Price skimming is the strategy of launching high to capture the customers most willing to pay, then lowering the price over time to reach the rest, extracting maximum value from each layer of the market in turn. Effective where customers vary widely in willingness to pay and the product can command an early premium, it stands as the deliberate opposite of penetration pricing, and the choice between them, harvesting margin from the top or buying share from the bottom, is among the defining pricing decisions a new product faces.