priceskimming

Price skimming is a pricing strategy used by firms when launching a new product or service. The core idea is to set a high initial price to maximize margins from early adopters who are willing to pay more for novelty or perceived quality, then lower the price over time to attract more price-sensitive customers.

By creating a price trajectory that captures different willingness to pay, firms can recover development costs quickly, signal premium positioning, and control demand. Price reductions may occur in increments, aligned with product iterations, competitive entry, or seasonal promotions. The strategy is most effective when the product has a clearly differentiated value, limited early supply, and inelastic demand among early buyers.

Compared with price penetration, skimming starts high and aims at high-margin segments rather than rapid market share. Risks include attracting competitors, harming brand image if prices are perceived as gouging, cannibalizing future sales, and reducing consumer goodwill. Its success depends on market structure, product advantage, and the ability to sustain a presence of early adopters.

It is common in consumer electronics, luxury goods, software, and pharmaceuticals where new features, quality, or scarcity justify higher prices at launch. Some firms manage expectations through multiple versions or limited editions to maintain perceived value across price tiers.

Ethical and regulatory considerations may apply, particularly around price discrimination and anti-competitive behavior. When applied judiciously, price skimming can balance early funding needs with longer-term market expansion.