Ecommerce Price Skimming. Advantages and Disadvantages of This Pricing Strategy
Ecommerce price skimming is a type of price discrimination and can be a useful pricing strategy depending on your business industry.
A lot of eCommerce pricing strategies talk about competing with competitors. Some eCommerce store owners will even go as far as to lower their prices to ensure they have the best deal on the market.
But what if there was a way to keep your prices high and still make a profit?
What if you were able to capitalize on your new products by having increased prices for early adopters?
That’s all possible with eCommerce price skimming.
In this blog post, we’re going to examine exactly what a price skimming strategy is, how to implement it and look at some of the advantages and disadvantages of using it.
What is ecommerce price skimming?
In its simplest terms, eCommerce price skimming is the art of setting high prices for your products during an introductory phase.
What this means is that businesses are able to leverage the “newness” of their product and maximize their profits from the get-go.
However, it’s important to note that price skimming usually works best when ecommerce store owners lower their prices as new competitors come to market. This will not only help you keep aligned with the current market rates, but encourage price-conscious shoppers to make a purchase.
Source: https://marketing-insider.eu/new-product-pricing/
How to implement price skimming?
What you need to remember about price skimming is there are consumers out there who want to be the first ones to get hold of a product. They like the feeling of exclusivity. In some ways, it makes them feel as though they’re part of a special club.
If you want to implement price skimming, then you could think about using phrases such as “exclusive offer” or “limited availability”, “be the first to get your hands on” within your marketing copy to make sure you highlight the need for consumers to take action right away.
You don’t even need to have a huge budget to create this sort of campaign, you can use social media, or even your own email list to build up initial excitement about your product.
But once you’re implementing price skimming, you need to make sure you watch your figures closely to ensure you’re making the most of it.
Don’t be quick to lower your prices, especially if there is still opportunity to keep your prices high.
You should only consider lowering your prices if consumer demand for your product falls, or competitors move in to sell the same or similar product at a lower cost.
Advantages of eCommerce price skimming?
There are two core advantages of using price skimming as an initial price strategy. The first is it allows you to maximize your profits
Not only that is it gives you an opportunity to make your product seem more elusive and special because of the feeling of prestige around the product.
When you implement a price skimming strategy you open yourself out to competitors who are willing and open to produce your product for a lower price, especially if they witness the initial traction your product launch generates.
For many ecommerce vendors, this might scare them away, but it doesn’t have to be this way. There are still ways you can use this to your advantage though.
It involves aligning your marketing so that despite the competition, your product appears as the superior one.
Usually, this is done by showing the value of your product by highlighting the benefits as well as the qualities that make your product original.
When your customers know your product is best, they understand why your price is higher. They understand that your extra features come with a higher price point, and they’re happy to pay.
Another benefit of price skimming is the ability to segment the market, whereby you control the price for one segment of customers. This way when new competitors arise they can target a different segment of customers who are happy to pay a different price.
Disadvantages of eCommerce price skimming?
One thing many people get wrong with price skimming is thinking they can use it as a long-term strategy. Now, while this might be the case for many high-value items, it often doesn’t work for the majority of products.
This is because very quickly, when a new, exciting product comes to life, the market becomes saturated and if you’re not careful, you might alienate price-conscious buyers.
It also doesn’t work if you’re trying to bring a product to market where there are already a high number of competitors. If the market’s early-adopters have already been established, it will be much harder to enter with a higher price point — unless your product offers significant advantages to the lower-priced competition.
Best examples of eCommerce price skimming?
Apple is one of the best examples of price skimming used most effectively. During the run-up to a new iPhone release, there are sufficient rumours before the announcement even happens.
Once it’s time for the actual announcement there has already been enough excitement drummed up that increases the buyer’s appetite for a purchase.
You’ll have seen the news, where wannabe iPhone owners would camp outside the store to be one the first to get their hand on the newest model. Others would pre-pay for their model weeks before they even get the phone.
So even though the iPhone will soon be available to everyone, they limit the initial numbers increasing the elusiveness of the product.
What Apple doesn’t do, which is in line with price skimming, is reduce their prices. When the newest phone model finally launches publicly for everyone, the price stays the same.
The reason they can defend such high prices is that of the increase in features promised by future iterations.
Takeaways
Ecommerce price skimming is a pricing strategy that allows vendors to charge a high initial price to then lower it slowly over time. Effectively it can be likened to skimming the cream off the top of the market.
They do this to stick with demand and make sure by the time new competitors enter the market, they already have a competitive advantage and have set themselves as the de facto brand to buy from.
Price skimming is often used to help vendors recover any costs of development they might have incurred.
It’s an effective strategy if you have enough potential customers who are willing to buy the product at a high cost in order to be one of the first ones to acquire the item.
Also, you should remember, that if lowering your price has a major effect on your overall unit costs and increased sales volume, then it might not be effective for you.
This story is published in The Startup, Medium’s largest entrepreneurship publication followed by 333,853+ people.
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