Should your software pricing involve skimming ?
Why this product pricing strategy could be the norm for enterprise pay-as-you-go (SaaS) software
If you purchased a newly launched product at a high price and found that the price lowered by half over a period of next 1 year, it is most likely that you were being skimmed.
Skimming refers to removal of the top layer from a substance. In the above example, skimming refers to the removal of the top high paying customer segment using a Higher Price strategy.
Price skimming is a product pricing strategy made famous by the likes of Apple and Samsung in recent years. This strategy is used to maximize profits when a new innovative product or service is launched in the market. Such a product is unique to the market, has customers who are ready to pay a premium for the product, and is far ahead from the competition.
Premium customers want to be unique and they want products which are status symbols. A higher market price for the product creates the perception of a luxury or value and positions this product higher than most competitors. Apple keeps the highest initial price that the first customers will pay and as soon as the demand of the first customer segment is satisfied (commonly known as early innovation adopters), the company will gradually lower down the prices over time.
A similar strategy is being played out in the Cloud Software-as-a-service (SaaS) product space . Years ago, Salesforce implemented Price Skimming strategy with the launch of their cloud CRM much before other software vendors jumped into this space. Enterprise deals with large companies enabled Salesforce to make a tremendous amount of revenue quickly as they were the early movers in this space. Later on, Salesforce was able to scale down to accommodate smaller businesses that also wanted to use the cutting-edge CRM. Now that CRMs are more normalized in the market, very few companies have employed skimming in the wake of Salesforce’s successful strategy.
If you are a technology start up or an enterprise launching innovative technology-driven products, you can definitely go for Price Skimming . Use price skimming as a pricing strategy to cover initial innovation and marketing costs and capture a significant market base at different levels of prices
Target customers who are in a highly competitive segment and are looking to invest in technologies for first mover advantage .It is also important to justify a business case for the customer from the use of your innovative product or service.
SaaS products are commonly priced at a tier based model which may also include a Price-per-user in each tier . Each customer could be billed a premium Price-per-user per tier . When prices are eventually lowered, the price in each tier is lowered to match the market competitive prices to enable continual sales of the product . For a SaaS vendor, it is beneficial to ensure lock-in of the initial high prices by signing advanced payment deals for longer billing cycles.
Price skimming is not a viable long-term pricing strategy, as competitors will eventually enter the market with rival products and exert downward pricing pressure.
Another effective strategy is to keep the high prices constant but introduce innovation and capabilities to justify the higher than market prices paid by the customer .
A certain marketing software vendor initially introduced automation capabilities only to their premium tier customers. With the increased competition , they were forced to role out these features to their entire customer base. To justify the higher than market price for their premium customers, a new A.I. capability was introduced exclusively for premium customers.
If your product boasts immediate competition, or if you have a product that isn’t appealing to the higher target segment of the market, then price skimming can prove to be an expensive waste. You may also not feel all the benefits of a skimming strategy if your product is not sufficiently unique to power a word-of-mouth reaction.
Without high quality and brand image, price skimming can impede your progress more than it can help. Incorporate skimming into your pricing strategy only when you have a technological first mover advantage and enough repeat buyers to generate dependable word of mouth and assurance that you can’t be easily undercut.
