The advantages of using a price skimming strategy in your eCommerce business

What is price skimming?

The strategy of price skimming consists of setting higher prices when entering a market where you still don’t have any competition. This is how the brand can pass the costs of entering the new market on to the consumer who has no choice in the matter due to the lack of competition.

This strategy should not be used over a prolonged period of time since, otherwise, the brand would be holding an abusive monopoly over the consumers. It does provide a good entry point, though, for those who take the risk first, allowing them to recover a good percentage of their investment in a short period of time, ensuring profitability.

By definition, price skimming reduces your visibility as the product becomes settled in the market and competitors began to enter using the same technology, deals, or products to cover similar needs. Thus, your price will readjust downwards over time, which may also vary if it forms part of a dynamic pricing strategy.

3 advantages of price skimming

• It allows for the recovery of investment and product launch costs. The first sales being made at a higher price make it possible for you to cover the cost of entering the market as well as the cost of developing the product of technology in the first place. In turn, this will allow for reinvestment in the future and/or upcoming improvements in the product itself.
• You’ll be able to carry out a price study based on reality. Once the entry phase is over, you’ll be able to begin choosing prices based on the sales generated and objectives achieved.
• There’s a natural segmentation of audiences that the product can penetrate. Once the price begins to lower, you’ll be able to extend its range to reach new potential buyers. Why not launch addition versions to appeal to different ranges and expectations? Adapt or die.

What can you do if you’re not alone?

Once the initial phase of price skimming has ended, we all know that prices will begin readjusting until they reach the appropriate market level to continue being competitive. However, this natural process must be accompanied by other actions from the brand so as not to be left behind when new competitors arrive.

One of these is innovation in terms of the virtues of the product. Within the framework of your brand’s pricing strategy, this is the best time to start considering using differentiated pricing strategies by offering premium versions, promoting cross-selling, or launching actions aimed at customer loyalty for your first buyers, for example.

With that in mind, this would be the time to begin monitoring your competition. Monitoring their entry in the market and changes in their prices using pricing analytics software will allow you to always be at the forefront and not miss out on a single sales opportunity.