How can eCommerce start-ups stay competitive in the market?
Price skimming is a short-term pricing strategy that involves eCommerce store owners selling products at a higher price. Over time, the cost is reduced incrementally until it levels at a competitive price point.
Ecommerce Wiki Definition of Price Skimming reads:
“Price skimming sees a company charge a higher price because it has a substantial competitive advantage. However, the advantage tends not to be sustainable. The high price attracts new competitors into the market, and the price inevitably falls due to increased supply.”
Whilst skimming is a short-term pricing strategy, innovative businesses can adopt it every time they launch a new product. The Apple iPhone is a prime example.
To benefit from price skimming, the conditions of the market have to be right for your product. The strategy works when there are no, or only a few competitors, the product has novelty value or it’s an innovation consumers will want to buy.
This article discusses the advantages and disadvantages of price skimming, how to implement it effectively and more.
The pros and cons of eCommerce price skimming
There is always a subset of consumers that want to be the first to own a new product. This enables businesses to take advantage of the price skimming strategy.
The core advantages of this pricing strategy are to position your product in the market and retain prestige over time. When products appear to be exclusive, they are more appealing to ‘early adopter’ consumers.tions on how much data a human being can accurately gather in a day, manual price collection may well be more trouble than it’s worth. By setting a higher price in the early stages, you maximise your profits and recover production costs sooner.
Innovative products with high consumer demand do not stay elusive for long. Competitor products inevitably enter the market and will typically undercut the price of the innovator.
Price skimming enables eCommerce startups to remain competitive in the market even when there is a higher supply from multiple other sources. By fixing a higher price point, you can encourage more distributors to stock your product due to the higher profit margin.
The only disadvantages of price skimming are that it can damage your brand reputation or put you out of business if the strategy backfires. If your pricing is too high, it can slow down the volume of demand and thus the growth of your business. There is also a risk consumers will perceive your brand as dishonest, manipulative and greedy. When early adopters see the price of your product plummet overnight, they may feel cheated.
However, eCommerce business owners can avoid this by providing a valid reason such as holding a sale, launching an upgraded version of the product, or issuing a statement letting customers know the prices are being lowered to stay competitive.
Ecommerce price skimming examples
Some of the most prominent firms that adopt price skimming examples are tech giants and gaming companies that consistently launch new products or upgrades on existing products. EA is a good example of a company that uses price skimming. Fifa 20 originally listed at a price point of £59.99 because they know gamers want the latest version. The price was eventually skimmed down to around £25.99.
Products such as revolutionary smartphones, games consoles, cars, laptops, HD TV’s etc are all subject to price skimming. Even though consumers are well aware of the cost of the latest version will eventually be reduced, some people are prepared to pay the high initial price.
Salesforce also used the price skimming strategy when they created a B2B SaaS platform in the cloud. They were the first company to offer this type of service and were able to take advantage of a high-end market at enterprise-level. As SaaS grew, Salesforce scaled down their service and their pricing to accommodate SMEs and increase their market share. Clothing and fashion items are known to use price skimming under the guise of ‘end of season sales’. It’s the perfect strategy for retailers to adopt until you clear your inventory.
Why should you use an eCommerce price skimming strategy?
When eCommerce start-ups initially go to market, there is a tendency to offer lower prices to attract customers and secure sales. However, low prices are not a good strategy for unique products in the early stages of the product life cycle. If you start with a penetration pricing strategy and low prices then customers expect you to keep your prices low even when competitors enter the market. Customers that are new to the product will sometimes opt for the higher price point because they expect the quality to be better.
Starting with higher prices positions you as a market leader. Even when you reduce your prices, you will still have an elevated price point that stands out as higher quality. With a competitive edge in a growing market, you boost the chances of your brand staying in business. Once you are established as a leader in your sector, you will always have customers that are prepared to buy your products at launch. Providing you have a unique selling point and retain the prestigious nature of the product, some consumers want to be the first to own the latest version.
How to implement price skimming?
Implementing a price skimming strategy successfully hinges on the quality of your marketing. You need to play on the prestige and exclusivity of the product to justify the high pricing.
Use phrases such as “unique”, “innovative”, “groundbreaking” and “pioneering” to flag the revolutionary aspect of the product. Appeal to early adopters by stressing the products is in “limited supply” and “be the first to own a …”.
High prices suggest high-quality so it’s important to have a product that justifies the price tag. Regardless of price, consumers always want value for money. Hold firm with your pricing. There is no reason to lower that price tag unless consumer demand is low or the competition heats up. You only need to lower your prices when you are not hitting your sales targets.
Price skimming is a short-term strategy that can have long-term benefits. Higher priced products with the quality to match positions you as a leader and earns you a reputation consumers trust.
With credibility on your side, your products will remain attractive to consumers who clammer to be the first to own the latest gadgets, cars or fashion item.
The best way to ensure your price skimming strategy is successful is to keep an eye of the market to identify when competitors are entering. With a price monitoring service, you have the capability of adjusting your price point without losing too many consumers to the competition.