Disadvantages of Price Skimming
1. It Only Works if Your Demand Curve is Inelastic
Price skimming might be a viable tactic for Apple, but that’s because the quantity demanded doesn’t rise and fall dramatically when the prices change. If the demand curve for your product is generally elastic, meaning price changes have a greater effect on product demand, then initial high prices could really hurt your sales volume. The goal of any company is to make a product as inelastic as possible, but not everyone is selling tech products or services that are ingenious enough to appear indispensable to consumers.
2. It’s Not a Great Strategy in a Crowded Market
In any industry, it is crucial to assess customer valuations and analyze the competition (and their market share) before setting your prices. If you already have a lot of competitors, then chances are your demand curve is fairly elastic, and high prices during your product launch will send customers running in the other direction. Price skimming is not a viable strategy in an already busy market. Unless your product includes amazing new features no one can match, it might be a good idea to avoid skimming if you want to maintain a competitive advantage.
photo credit: pangalactic gargleblaster and the heart of gold
3. Price Skimming Attracts Competitors
Maybe your product is groundbreaking enough that it will create a new market, but as shown by the introductions of the iPhone and the iPad, competitors like Samsung and Microsoft are lurking just around the corner. The success of high prices at the beginning of a new product’s life cycle will intrigue competitors to enter the market, and the inelasticity of a demand curve is almost always reduced over time due to the introduction of viable substitutes. Skimming pricing can also slow the rate of adoption by your potential customers, giving the competition more time to imitate and improve upon your product before you’ve capitalized on the demand for the innovation.
4. It Can Infuriate Your Early Adopters
Remember those brand evangelists that bought your product first? They can just as easily trigger your worst PR nightmare. If prices drop too much or too soon after the initial product launch, your early adopters will feel like they got the short end of the stick. Apple experienced this type of backlash in 2007 when the company reduced the price of the iPhone by $200 just two months after its introduction. The quick 33% price drop from $599 to $399 may have helped increase demand, but some of the phone’s early adopters were understandably upset.
To ensure the customers at the top of your demand curve don’t feel cheated, it’s important to use price skimming consistently and avoid hurried or blatantly obvious reductions in price. Price skimming can also be considered price discrimination, which is the strategy of selling the same product at different prices to different groups of consumers. In some cases, this strategy is against the law, but the actual conditions that define illegal price discrimination are shady, to say the least. For more on the ethical issues of price discrimination, check out our post on pricing strategy ethics.