Price skimming

Price skimming is a pricing strategy where a business launches a product at a high price and then lowers that price over time. The first customers pay more to own the product early, while later customers buy once the price becomes more affordable.

It suits a product where initial demand is expected to be high, so enough customers will pay the high launch price. For example, a company launches a new smart coffee machine at £650. Keen customers who want the latest gadget in their kitchen buy at launch. Six months later, the price drops to £520, then to £450 as rival machines appear and the business needs to attract shoppers who would not pay £650. The business earns a high revenue per unit from early buyers, which can maximise profit from customers willing to pay a premium. The high price can also make the product seem desirable and special.

However, price skimming may deter some customers who cannot or will not pay the launch price. Some of them wait for the reduction. This is a risk because, by the time the price falls, a newer or more attractive product may be on sale, so those customers buy from a rival instead. Price skimming is often associated with new high-technology products, where early buyers value having the latest version.