Price skimming refers to the pricing of a new product or service at a very high level (while you can get away with it). This type of pricing is often deployed for a product which has a competitive advantage that is not sustainable. This happens a great deal in technology when an innovative product first captures the customer’s attention and the competition later follows.

Another reason to set an initial high price is to establish the new product as a prestige or a high quality product. Buyers have been taught that quality comes at a higher price, so in a weird way buyers are comforted by the higher pricing.

Alternatively, when you begin with a high price, you have room to move down in price with the anticipated entrance of competition. To generalize, most prices go down when competition joins the fray. This logic suggests that you should anchor with a price high and prepare to negotiate.

An example of skimming would be the DVR (digital video recorder) product called TiVo, which has revolutionized watching television. Early on, this was a product for the early adopters and TiVo products commanded a premium price. Competition entered the market and prices softened. Soon all satellite receivers will have DVR features. Game over.

However, skimming is not the preferred pricing method for a niche market player. Niche marketers create value based on a sustainable competitive advantage and a partnership with the customer. The customer values the offering above other alternatives and considers the pricing fair.

Pricing on value is a better approach for niche players.

John Bradley Jackson
© Copyright 2008 All rights reserved.

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  1. Brian K.

    One of my marketing professors had talked about this strategy when it came to finding the *right* pricing for a specific offering. He mentioned that it isn’t always the best method for the reasons you stated in your blog. However, he did mention that an alternative to market your offering is to start the price off low to discourage competitors from entering your specific market. Once you’ve obtained:

    a. A large enough share in your specific market


    b. A loyal customer base

    then you could raise your prices again. The goal would be to establish that image that you have a great product for a great price. Once that’s in the mind of buyers, you can set the price at almost anything you want.

    In the case of TiVo, I believe that if they had started out at a low price and maintained a high quality product, they would have really discouraged the development of DVRs from other companies. To this day, even though the prices have dropped, I still have the image that TiVo is a premium brand (not product) but that other companies can achieve the same experience for less money.

  2. Anonymous


    Interesting points and well said.

    Re Your professor’s comments: I suppose it is possible to raise prices later if there is little or competition, but in practice it would be really difficult. The product would have to deliver terrific value to justify the increase prices (I guess one question is how much are talking about?).

    I feel the same way about the TiVo brand—it means status to me which I guess is the reward of being the first to market.


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