Price Skimming: Set and Lower a Launch Price
Price skimming is a new-product pricing strategy that starts with a high launch price and lowers it over time to reach successive groups of buyers with lower willingness to pay.
How price skimming works
The strategy separates demand by purchase timing: buyers willing to pay the most are served first, followed by other segments at lower prices. The intended progression is a high opening price followed by reductions, rather than a single launch discount.
To assess that progression, track the same product configuration in the same market. Keep changes in storage, features, package size, or included services separate from changes in its selling price. Record the opening price, subsequent prices, and the dates each takes effect.
Price skimming vs. penetration and premium pricing
These strategies differ in their opening price and commercial purpose:
| Strategy | Opening price | Purpose and price path |
|---|---|---|
| Price skimming | High | Serve buyers willing to pay more first, then lower prices to reach additional segments. |
| Penetration pricing | Low | Gain market share and sell large volumes. |
| Premium pricing | High | Charge a high price for distinctive value or a substantial competitive advantage; staged reductions are not its defining feature. |
Promotional pricing uses tactics such as coupons, volume discounts, and bundles. To identify skimming, examine the product’s launch price and subsequent selling prices rather than an isolated promotional offer.
A documented example: the original iPhone
Apple’s June 2007 launch announcement listed the original 8GB iPhone at US$599, with US sales beginning on June 29, 2007. On September 5, 2007, Apple announced a reduction from US$599 to US$399 for the 8GB model, stating that the lower price would make the phone affordable to more customers for the holiday season.
This illustrates the high-to-low price path for a consistent product configuration. The announcements document the prices and Apple’s stated objective; they do not establish whether the reduction maximized profit.
When price skimming is suitable
A defensible launch premium requires a reason for buyers to accept it: Cornell’s pricing module associates skimming with new or innovative products facing little initial competition. Early production capacity also matters: ACCA explains that limited output at launch can make high prices and lower volumes a sensible combination.
Before choosing skimming, check the product’s advantage over available substitutes, evidence of purchases at the proposed opening price, and the economics of selling at later prices. Assess each separately; interest in a new product is not a measurement of how many units will sell at a specific price.
Benefits and risks of price skimming
The main opportunity is to capture demand at different levels of willingness to pay over time. New-product pricing also needs to help recover research and development costs. Evaluate those objectives against actual sales and costs rather than treating a high opening price as proof of success.
Three risks deserve attention:
- Too little demand at the opening price. ACCA warns that an unaffordable price can leave a product with too few sales.
- Buyers waiting for reductions. Harikesh Nair’s research on US video games identifies anticipation of future price declines and delayed purchases as important to pricing profitability. Its market-specific findings do not supply a waiting rate for other products.
- Pressure on the premium and price perceptions. Cornell describes competitive entry as a reason to reduce a skimming price and warns that cuts without changed benefits can make earlier prices appear inflated.
How to set the launch price
Start with the pricing inputs identified by OpenStax: costs, customers, distribution channels, competition, and compatibility with other marketing decisions. Turn those inputs into a comparison of candidate launch prices.
Establish a market benchmark. Record selling prices for comparable products, their availability, and the differences buyers receive for the premium. Compare equivalent configurations and selling terms. Identify the launch objective, including the relative importance of early contribution and wider adoption.
Check willingness to pay. A meta-analysis of 77 studies on consumer goods found that hypothetical willingness-to-pay measures tended to overestimate real willingness to pay. Treat survey responses as an input to pricing research, then check them against transactions or research involving a payment obligation. The findings do not prescribe a universal adjustment to a survey-based price.
Account for the selling channel. OpenStax notes that intermediaries need to cover their own expenses and earn profits. Separate the retail price, wholesale price, and amount retained by the seller before comparing price paths.
Compare contribution and costs over the product’s life. ACCA’s lifecycle-costing guidance includes pre-production, production, and post-production costs. Include those costs when evaluating the return from the full price path, alongside expected unit sales at each price. Label forecasts separately from observed sales.
For the unit economics, VCU defines contribution margin as selling price minus variable cost:
Contribution per unit = selling price per unit − variable cost per unit
Multiply each period’s unit contribution by its unit sales, then add the periods together to compare total contribution. Deduct fixed costs separately to assess profit. Use this calculation to compare the skimming path with a steady price or a penetration price; the calculation requires sales estimates for every candidate.
When and how to lower the price
Cornell identifies serving the early buyers and the arrival of competition as reasons a skimming price can fall. Translate those considerations into review points based on current evidence:
- Review orders and completed sales at the opening price over a defined period.
- Compare the prices and availability of close substitutes.
- Check stock, delivery capacity, and the ability to serve additional demand.
- Recalculate unit contribution and expected sales at the proposed lower price.
Before a reduction, calculate the volume needed to preserve total contribution. Applying VCU’s contribution-margin formula gives:
Required new volume = old volume × (old price − variable cost) ÷ (new price − variable cost)
This is an arithmetic comparison for equal periods, unchanged variable cost per unit, and positive unit margins. It excludes changes in fixed costs and does not predict whether the required volume will materialize.
Include the timing of purchases in the assessment: Nair’s model accounts for consumers who delay buying to obtain lower future prices. Distinguish additional demand from sales postponed from the higher-price period. After each reduction, record the actual selling price, units sold, variable costs, and contribution, then use those results to review the next price step.