Price Skimming

Price skimming extracts maximum revenue by targeting different customer segments sequentially. Early adopters who value the product most pay premium prices. As that segment is saturated, the price drops to capture the next tier of customers, and so on. This creates a cascading revenue model where each price reduction opens a new market.

Apple is the most visible practitioner of price skimming. New iPhones launch at premium prices for early adopters. Six months later, the price drops. A year later, the previous model is available at a significant discount. Each tier captures a different customer segment at their maximum willingness to pay.

Price skimming works best for innovative or highly differentiated products where early customers have high willingness to pay. It fails when competitors can quickly introduce similar products at lower prices, undermining the premium before you have recouped development costs. Strong intellectual property protection, brand loyalty, or technical complexity are usually prerequisites for successful skimming.