The price-skimming strategy is an approach to setting prices used when launching high-end products. A powerful tool for businesses, it involves offering a new, high-quality product – or one with a strong value added – and pricing it higher than average. This strategy enables companies to maximise their profits, increase their products' perceived value, and improve their branding and appeal to customers. At the same time, price skimming is not an approach that works in all markets or for all businesses. It's important to determine when this strategy is appropriate.

In this article, we describe the price-skimming strategy in France, including markets where it works well, its advantages and disadvantages, and how to efficiently implement it.

What's in this article?

• What is a price-skimming strategy?
  
• What are the advantages of a price-skimming strategy?
  
• What are the disadvantages of a price-skimming strategy?
  
• Who is the target for a price-skimming strategy?
  
• When should you use a price-skimming strategy?
  
• Successful use of a price-skimming strategy
  
• Louis Vuitton: An example of a successful price-skimming strategy
  
• How Stripe can help
  

What is a price-skimming strategy?

A price-skimming strategy launches a product at a price higher than average to maximise profitability. The higher price targets a customer base that is ready to pay, and the strategy is usually applied to innovative, luxury, or high-value products.

This pricing strategy is based on the idea of improvement and exclusivity. The targeted customers – early adopters – are devotees or have strong purchasing power. They are ready to pay a higher price to obtain a new, innovative, high-performance, or exclusive product. The perception that the product is high-end at the beginning of its life cycle leads to the product seeming unique and desirable.

Price-skimming strategies have several goals:

• Filter or skim the customer base to identify customers who are ready to pay the price offered at launch.
  
• Maximise the net profit to sales ratio at the beginning of the product's life cycle, rather than the volume of products sold. Quickly recoup development costs.
  
• Progressively reduce the product price throughout its life cycle to access a larger customer base.
  
• Project a high-end brand image and high product valuation.
  

What is the difference between a price-skimming strategy and a market-entry strategy?

A price-skimming strategy aims to set a high price at product launch to garner a premium customer base and maximise profitability. A market-entry strategy aims to set a price lower than market prices to attract a large customer base and become established in the market at product launch.

What is the difference between a price-skimming strategy and an alignment strategy?

A price-skimming strategy sets a price that is higher than competitors' averages to differentiate the company and establish high-end positioning. An alignment strategy sets a price that is similar to the competition's price to remain competitive and to have average positioning within the industry.

What are the advantages of a price-skimming strategy?

A price-skimming strategy offers several advantages to companies that implement it efficiently:

• Profitability: With a higher launch price, price-skimming maximises short-term profit margins.
  
• Recouped costs: Maximising short-term profitability makes it possible to quickly recoup research and development (R&D) costs and reinvest the profits into other projects.
  
• Branding: By proposing a product at a higher price, the company filters customer segments to identify only those who are ready to pay this price. This allows for premium positioning, which can ensure high-end branding.
  
• Customer loyalty: Early adopters want to set themselves apart. This strategy gives them the impression of exclusivity and creates a feeling of community and loyalty to the brand. Early adopters become brand ambassadors and boost the brand further.
  
• Flexibility: A price-skimming strategy evolves. The launch price is lowered across the product life cycle, specifically when its competitive advantage declines.
  
• Market segmentation: Price skimming makes it possible to progressively expand customer segments – from a narrow customer base at launch to a larger one over time throughout the product's life cycle.
  

What are the disadvantages of a price-skimming strategy?

Despite its swift profitability and added value to the brand, a price-skimming strategy also has several risks and disadvantages:

• No economies of scale
  A price-skimming strategy makes high profit margins possible when a product is launched. However, it does not lead to selling high volumes. This impedes economies of scale and causes a decline in margins over time.
  
• Barriers to purchasing
  If price skimming targets a wealthier customer base at launch, it also excludes a large part of the customer base. Even after the price is reduced, the larger customer base could be reluctant to buy the product, slowing down its general adoption.
  
• Strategy adaptation
  If a business consistently uses price skimming, the customer base could be encouraged to wait for the product's inevitable price drop after launch. This is especially true if the price is not justified by the product's quality or improvement. This can impact profitability at launch.
  
• Excellent customer experience
  For a product to be perceived as luxury or exclusive and be adopted by customers, the company should offer a high-quality or innovative product. It should also carefully manage product marketing to meet customer expectations and ensure the product's profitability and branding. This includes packaging, communication, availability, distribution network, after-sales service, etc.
  
• Constant improvement
  To justify premium price positioning and continue to attract a customer base that's ready to pay, the company must constantly improve. It should offer innovative, exclusive products, use leading technology, or offer significant competitive advantages.
  
• Awareness of competition
  After a business launches a premium, high-priced product, competitors could offer similar products at lower prices. This is especially true within very competitive markets. This can lead to competitors gaining a larger customer base that is more sensitive to price.
  

Who is the target for a price-skimming strategy?

A price-skimming strategy only works in certain types of markets. This includes markets with low price elasticity and competition. It also works in markets with strong demand and fast-paced improvements where differentiation and exclusivity are important factors. This includes markets related to technology, electronics, health and drugs, fashion and luxury goods.

This pricing strategy works well in the following markets:

• Technology and electronics: This includes smartphones, televisions, graphic cards, game consoles and other industries where improvement creates a strong differentiator and increases perceived value for early adopters.
  
• Health: This strategy can work for medications, diagnostic devices or healthcare that responds to unmet medical needs.
  
• Luxury and fashion: This includes industries where price contributes to a product's perceived value and increases brand image, such as shoes, haute couture, watches, cosmetics, jewellery and others.
  
• Automobiles: Sports, electric or hybrid cars offer new performance metrics or technology that creates a need for exclusivity before being available to the general public.
  
• Works of art: This includes art, wine, and other industries where price is an indicator of value and scarcity.
  

Conversely, price skimming is not well adapted to markets where price elasticity or competition from interchangeable products is significant. It is also not well suited when perceived product value is weak or customers are more sensitive to price than newness or improvement.

When should you use a price-skimming strategy?

Price-skimming strategies are recommended when a company launches an innovative, tech, or exclusive product with a targeted customer base that is ready to pay higher than market price to own the product first. This strategy is also recommended for products where companies have made large R&D investments because it can help to quickly recoup these costs.

Successful use of a price-skimming strategy

A successful price-skimming strategy sets a high initial price and creates the conditions that justify the price. Before launching a price-skimming strategy, you should follow specific steps.

Analyse the market to verify that price skimming is appropriate

Determine if a price-skimming strategy is appropriate for the product being launched. This includes a new or innovative product, weak competition, previously established premium brand positioning, loyal customer base, and the opportunity to create a scarcity effect or exclusivity.

Identify the customer base that is ready to pay

Analyse the market to identify the customer segments that are not price sensitive and are ready to pay a higher price at launch. You can conduct studies on segments to determine their price sensitivity by using, for example, the Van Westendorp or Gabor-Granger methods.

Define the launch price

The launch price should be higher than the market's average price, reflect the product's improvement or quality, and remain consistent with your premium positioning. The price should also maximise profit margins to quickly recoup R&D investments and product and marketing costs.

Prepare for launch

To guarantee the product's launch success, you should run a strong marketing campaign that emphasises its quality, improvements, advantages over the competition, exclusive nature, or scarcity to justify its price. Also emphasise that your brand is high-end and premium.

You can communicate with potential customers in different ways:

• Events before the launch, including pre-orders, wait lists, lotteries
  
• Exclusive access, including limited editions, early access, loyalty clubs
  
• Ambassadors or influencers
  
• Industry press
  

Schedule price drops

Once the product launch has ended, you should schedule future price drops (e.g. product life cycle, customer behaviour, competitor response, initial profitability goals reached) to maximise profits at each stage. Price reductions should be implemented thoughtfully to attract a larger customer base without impacting your product's premium image or company's brand according to early adopters.

Follow product performance

During each life cycle stage, you should track certain key indicators and adapt your strategy. These indicators include conversion rate, sales volume, price elasticity, product value perception, launch of new competing models, etc. Tracking and proactively reacting to these indicators can help guarantee the relevance and effectiveness of your price-skimming strategy over time.

Louis Vuitton: An example of a successful price-skimming strategy

Louis Vuitton – the French brand within the Louis Vuitton Moët Hennessy (LVMH) group – is a classic example of a company using a price-skimming strategy. The brand sells luxury products (e.g. leather goods, ready-to-wear clothing, jewellery) and has premium positioning that targets a demanding customer base seeking exclusivity.

Louis Vuitton's higher prices are justified by high-end production (e.g. high-quality raw materials, unique craftsmanship, manufacturing exclusively in France). Prices are also impacted by low competition, a long wait list, and attractively designed, high-end boutiques located in exclusive neighbourhoods, such as the Champs-Élysées in Paris. Product costs are rapidly recouped with the significant margins realised on each product, eliminating the need to sell large volumes.

The company reinforces its high-end branding with a personalised customer experience that aims to increase loyalty and customer engagement (e.g. VIP services in-store). In addition, Louis Vuitton continues to increase its investments in major sporting events – such as the Olympic Games in Paris – to increase its worldwide visibility and luxury image.

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