Originally published: June 13, 2023
Updated: 11/3/2025
In this article by Dan Cakora, Business Consultant at Vendavo, learn the benefits of maximizing profit, enhancing brand perception, and enabling faster cost recovery with price skimming techniques and strategies.
Ever wondered why the price of a new Apple iPhone starts so high when introduced? Or why Tesla electric vehicles are positioned as a premium product? Price skimming is a pricing strategy that sets a high initial price for new products and gradually lowers it over time. In both cases, Apple and Tesla are engaging in price skimming. But when should it be used, and what are the pros and cons of the strategy? Read on to find out if it might be appropriate for your products.
What is Price Skimming?
Price skimming is a strategy in which a company initially sets a high price for a new product or service and gradually reduces it as the product gains wider adoption. This approach works by targeting customers who perceive high value in the new product and appreciate its novelty. Consider how this played out in the B2B software industry of the early 1990s.
Salesforce pioneered price skimming in the B2B SaaS space when it introduced the first cloud-based CRM in 1999. The company targeted enterprise-level deals with large organizations willing to pay premium prices for cutting-edge cloud technology. This high-tier pricing helped Salesforce recover substantial development costs while establishing its product as an industry standard. As the CRM market matured and cloud solutions became more normalized, Salesforce scaled down its offerings to accommodate smaller businesses. This B2B pricing strategy not only generated rapid revenue but also created a premium brand position that persists to this day.
When is a Price Skimming Strategy Most Effective?
Price skimming is most effective during the early stages of the Technology Adoption Lifecycle, particularly for customers who are considered innovators and early adopters.
As indicated by their name, “Innovators” are the first group to adopt a product or technology. They are part of a niche group and probably have a connection to the new product or service being introduced. They provide a critical service of validating fit and spreading awareness of the product or service. This is usually a very small group, so it is difficult to extract large profits from customers at this stage. It’s usually better to think of the “profit” in terms of market validation and a dedicated group of core customers that can evangelize the product.
“Early Adopters” are often influencers in their social group. They serve as informal gatekeepers that either generate buzz for a product or snuff it out before it has a chance to find wider adoption. Part of the appeal of a new product may be the additional features, but much of the appeal is derived from the exclusivity of having a premium product. Because of this, “Early Adopters” tend to be willing to pay a premium for the latest-and-greatest gadgets and services.
Also read: Willingness to Pay: Understanding WTP and Using it for Optimal Pricing
Adapt Price Skimming Across the Lifecycle
As a product is adopted by later stage lifecycle customers, the price strategy must mature accordingly. Increased competitive pressure combined with a need to capture a larger share of the market drives the need to reduce prices over time. The Early and Late Majority will have many similar products to choose from, so a competitive price for these groups is a must. Laggards often must be enticed to buy a product by offering discounts or promotions.
How Price Skimming Works
Price skimming follows a deliberate progression that mirrors the product adoption curve. Understanding how to set prices at each stage helps companies optimize revenue at each stage while avoiding common pitfalls.
- Target customer segments: Price skimming starts by focusing on innovators and early adopters who value exclusivity and innovation over cost. These customers are willing to pay premium prices because they see first-mover advantages or want the status of owning something new. As demand from this segment is satisfied, companies shift focus to the early majority, a larger group that waits for proven value.
- Strategic price reduction phases: Price reductions should follow a predetermined schedule rather than reactive decisions. Companies typically lower prices in 3-4 phases over 12-24 months, with each reduction targeting a new customer segment. Nike demonstrates this approach with limited-edition trainer releases, charging premium prices at launch before systematically reducing them months.
- Product lifecycle sweet spot: Price skimming works best during the introduction and early growth stages of the product lifecycle. This is when differentiation is strongest and competition has not yet caught up. By the maturity stage, market forces and competitive pressure make premium pricing harder to sustain.
- Timing and market conditions: The speed of price reductions depends on competitive response and market saturation. If competitors introduce similar products quickly, you may need to accelerate your price drops. Conversely, if you maintain a strong differentiation advantage, you can extend the premium pricing period to maximize margins.
- Communication strategy: Each pricing phase requires clear messaging that justifies the current price point to its target segment. Early adopters need to understand the exclusivity and innovation premium. Later buyers need to see how the product has proven its value and become more accessible.
Where is Price Skimming Most Used?
Price Skimming can be very profitable while the opportunity exists. It is most prevalent in:
- Technological Consumer Goods
For example, the Apple iPhone and various models of Tesla have disrupted two well-established markets. In scenarios like these, price skimming can be employed to capitalize on certain customers’ willingness to pay a premium for the latest features and functionalities. - Luxury Goods
High-end luxury brands often utilize price skimming to maintain an aura of exclusivity. By setting high prices for their products, these brands attract affluent customers seeking status symbols. - Pharmaceuticals
Pharma companies often use price skimming for new drugs or treatments that address previously unmet medical needs or are otherwise more efficacious treatments. They initially set high prices to recoup research and development costs and establish a return on investment before generic alternatives enter the market.
3 Reasons to Engage in Price Skimming
Why would you consider adding a price skimming strategy to your pricing program? These are the 3 most-common reasons.
- Deliver Maximum Profit
Price skimming enables companies to capture maximum revenue in the early stages of a product’s lifecycle. This approach targets customers willing to pay a premium and allows for increased profitability.
- Heighten Brand Perception
The high initial price in a price skimming strategy can create a perception of exclusivity, quality, and innovation, thereby supporting the brand halo. This enhanced image attracts customers seeking premium products, which can establish a company as a leader in its respective market.
- Enable Faster Cost Recovery
By setting a high price, companies can recover their R&D and initial production ramp-up costs more rapidly.
Businesses have many options for getting their products out there, and a host of different ways to price. Learn more in The Definitive Guide to Pricing Strategy: Types, Benefits, and Best Practices.
Why Price Skimming Can Deter Competition
Price skimming does more than maximize early revenue. It creates a competitive moat that protects market position during the critical launch phase.
High initial pricing signals brand confidence and establishes premium positioning before competitors can react. Companies that successfully recoup R&D costs through early high-margin sales gain financial flexibility that late entrants cannot match. This head start allows market leaders to invest in product refinement, customer loyalty programs, and marketing while competitors are still trying to break even.
Potential competitors face an uncomfortable choice when they see established price skimming strategies. They can match the high price point and struggle with lower brand recognition, or they can undercut on price and risk being perceived as inferior quality. Neither option is particularly attractive, which gives the first mover valuable time to cement market dominance. By the time competitors are ready to enter, the skimming company has already shifted to serve broader market segments with adjusted pricing and a loyal customer base.
Learn more about how high-performing companies are embedding strategic pricing in sales workflows and building scalable infrastructure. Get a copy of our 2025 Pricing, Selling, and Profit Optimization Report.
Why Price Skimming Matters to Pricing Pros & Sales Teams
Price skimming requires tight coordination between pricing and sales to execute well. Both teams need a shared playbook that defines initial list prices, planned step-downs, and exact timing by segment and region.
- Discount guardrails are critical: At launch, discounting should be tightly controlled to protect premium positioning. As each pricing phase activates, you can progressively relax these guardrails to accommodate broader market segments. Without this discipline, sales reps may inadvertently collapse your entire pricing structure before you capture early-adopter value.
- Sales enablement makes or breaks the strategy: Reps need clear value insights that justify the premium price. What innovation does it deliver, why scarcity matters now, and what business outcomes early adopters can expect. Arm your team with objection-handling scripts for “I’ll wait for the price drop” and competitive undercutting scenarios. The best response reframes exclusivity and first-mover advantages rather than defending price alone.
- Account prioritization should mirror the adoption curve: Target innovators and early adopters first. Defer price-sensitive accounts to later waves when pricing has adjusted. This sequencing prevents margin erosion and maintains market perception.
- Channel discipline protects your strategy from premature price collapse: Use minimum advertised pricing (MAP) policies, promotion embargoes, and strict bundle rules to prevent partners from undercutting your positioning.
Create an elasticity feedback loop: Quantify demand at each pricing step to refine the timing and depth of future reductions. This data turns price skimming from a one-time tactic into a repeatable capability that improves with every launch.
Avoid These 3 Common Price Skimming Pitfalls
Not all that glitters is gold. Price Skimming can be effective when done correctly, but pricers should beware of common pitfalls.
- Failure to Evolve the Strategy
High initial prices will deter price-sensitive customers and this limits broad adoption in the beginning. If the initial Price Skimming persists and is never transitioned to a Price Penetration strategy, then the market will remain small.
- Increased Competition
Eye-popping results encourage competitors to enter the market with lower-priced alternatives. As the price gradually decreases due to increased competition, profitability must be managed or can erode over time.
- Negative Customer Perception
Some customers may perceive price skimming as unfair or price gouging. This negative perception can lead to a short-term boost to margins at the cost of long-term customer relationships.
When it’s all said and done, price skimming should be considered another arrow in the quiver of the savvy pricing practitioner. Application varies depending on industry, product characteristics, and market dynamics, but when done well, it can lead to exceptional financial results.
FAQs
How is price skimming different from penetration pricing?
Price skimming and penetration pricing are essentially opposite strategies. Skimming starts with high prices to maximize early profits from customers who value innovation and exclusivity. Penetration pricing does the reverse: it sets low initial prices to quickly grab market share and attract price-sensitive buyers. Skimming works best for unique products with little competition, while penetration thrives in crowded markets where you need to pull customers away from established competitors.
What are the risks of price skimming?
The biggest risk is alienating the broader market before you ever reach them. If your initial price is too high or you wait too long to adjust, competitors can swoop in with lower-priced alternatives and capture the mass market. You also risk damaging customer relationships if early adopters feel exploited when prices drop quickly. Poor execution can make your brand look opportunistic rather than premium.
How do you know when to lower prices in a skimming strategy?
Watch for declining sales velocity and increased competitive activity. When your early adopter segment is saturated and new customer acquisition slows, that signals it’s time for the next price tier. Monitor market feedback and customer inquiries from price-sensitive segments. If competitors are launching similar products or your differentiation advantage is narrowing, accelerate your timeline.
Can price skimming work in competitive markets?
It can, but you need a genuine differentiation advantage that competitors cannot quickly replicate. Strong brand equity, patent protection, or proprietary technology give you the breathing room to maintain premium pricing even with competition present. In highly commoditized markets with low switching costs, skimming becomes much riskier because customers will simply choose the cheaper alternative.
How do you measure if price skimming is working?
Track revenue per customer segment and compare it to your projected adoption curve. Monitor your gross margin percentage at each pricing phase to ensure you’re capturing the premium you planned for. Watch customer acquisition costs and conversion rates by segment. If early adopters are buying at your target volumes and margins remain healthy as you move down-market, your strategy is on track.