Before launching a new product, you need to straighten out numerous marketing issues. These include determining the target customers, finding the distributors and the right branding and packaging styles. One minor (but important) detail that most entrepreneurs leave out is the product pricing. Failure to set the right price can lead to the collapse of the new product line even before it hits the ground running. It is imperative to use the right pricing technique or strategies in order to achieve desired results such as skimming price strategy.
This is the practice of setting an unreasonably high price for a product on its first days then systematically reducing the price as the sales grow. The skimming price strategy can bring in some great profits in the following ways.
How Does the Skimming Price Strategy Really Work?
1. Develop a Unique Product
For the skimming price strategy to produce any reasonable returns, the product has to be unique and have little to no existing competition. Notably, it is next to impossible to have a completely unique product in the current society. But you can try to make yours a little bit different by giving it some exclusive features, unique packaging and so on.
Think of Apple products and how they are packaged as different from the ones from the competitors.
2. Sleek Marketing
This involves designing a marketing strategy that will effectively create the impression of a luxury product. The skimming price strategy is mainly tailored for the high end market who are more concerned about the quality, real or perceived, rather than the price. However, your initial marketing strategy should be able to positively appeal to that particular group.
Once the target group gets the message that the product is cool, high quality and durable, they will purchase it at whatever price. As a result, this will translate to higher profit margins. Some brands are known to use celebrities and other popular people or personalities to market their new products and it almost always works.
3. Know Your Target Market
In today’s world, it would not make business sense to limit your market to just one area or country. Most businesses have their target market spread over several geographical regions. Before implementing or even thinking about the skimming price strategy, it is important to first understand the market. You need to also learn how people from different regions or countries are likely to react to your strategy.
Take into account the various social, religious and economic contexts your target market exists in before implementing the strategy.
- For instance, some countries have lower per capita income (relatively poor populations). Therefore, the skimming price strategy won’t work if the prices are set too high.
- On the other hand, some like the US have higher personal incomes that translate to higher prices that fetch large margins.
4. Develop a Good Brand Reputation
No matter how well thought your strategy is, it will more likely fail if your business is unknown or a start up. Therefore, if you are on your first or second product as a business, don’t expect much profit. This is because most consumers do not know you. You wouldn’t pay top dollar for a product no one knows, would you? When you see brands like Apple over pricing their products and still getting huge sales two words should stick to your mind—Brand Name.
Develop a brand name first which should be relatively easy these days with the power of the Internet. Later on, you can adopt the skimming price strategy after you are sure that people hold your business in high regards. The secret here is not to rush into things, something successful businessmen and army generals would stress on.
5. Constantly Improve Production Processes
The primary goal of the skimming price strategy is to increase the profits from a particular product especially early in its life cycle. In business terms, profit is the difference between the manufacturing cost and the selling price. Therefore, to achieve higher profits from the strategy, you need to have an efficient manufacturing system in place. This system needs to give value for money while still producing high quality products.
As it is, this might not be possible at the early stages since research and development is still ongoing. However, the key is to continue working on ways to improve the manufacturing processes with a view of minimizing the overall costs. Lower manufacturing costs will directly translate to higher profit margins even when the product price eventually drops.
6. Ward Off the Competition
Imagine this, you discover a completely new technology that can make better phones than Apple and/or Samsung ever will, and at lower costs. Naturally, you want to make as much money from it as possible. This is because it is what a business does. However, there is a small problem – you’re basically unknown in the business world. If you go public with your technology, chances are that one or several of the big technology companies will copy it. You might end up making nothing out of your idea.
What should you do now? Copyright your idea. Sounds good and is actually good. Getting a patent for your idea basically gives you some sort of monopoly power for some definite time. This way, you can capitalize on that by setting high prices for your first products. By the time the competition attempts to catch up, your account will be bulging at the seams.
7. Alternate Strategies
Price skimming can work perfectly on its own but can work even better when alternated with other pricing strategies. One of these is the optional pricing strategy. This introduces extra products that are often complementary to the primary product in a bid to make the buyer spend more, thus more profit.
To Sum It Up
The skimming price strategy is one of the most popular techniques in the business world today, particularly among big companies. It is important to have the perception that a product is new and exclusive to get the customers to pay a premium price.
A number of people do not agree with the strategy. Yet, we know for a fact that if used correctly, it can allow a company to recoup its initial capital investment before the competitive forces introduce a pricing balance in the market.