Choosing a product pricing strategy is a momentous decision for any young SaaS company. Not only does it define your early monetization strategy, but it also heavily influences what market segments you’re likely to appeal to directly and how your product will be perceived.
Of course, the better your product is, the more people it’s likely to appeal to. So how do you go about brewing up a product pricing strategy that doesn’t restrict your product’s appeal? How can you chase those affluent, upper-market segments without making yourself off-limits to those lower on the willingness-to-pay chain?
One way to do that is through price skimming. It’s a demanding approach, and one that isn’t for every company. But if chosen and executed right, price skimming can lead to unparalleled market advantages and a huge boost both in revenue and in the esteem in which your product and company are held.
Price skimming involves initially charging the highest price your market will accept for your product, then lowering it over time. The logic behind this is that you attempt to “skim” off the top market segment to which you appeal, at the time when your product is freshest, thereby maximizing your profit early on.
The principles behind price skimming
Using a price-skimming strategy means you’ll need to closely manage your product’s trajectory following its launch. Enthusiasm for your product is likely to be at its highest immediately after its release. By prioritizing your early efforts toward appealing to upper-market segments, you can quickly recoup the cost of development and make a steady initial profit.
Your product is also least likely to have direct competition immediately following its release. And by the time any competition for your product does emerge, you’ll have consolidated your reputation with that initial wave of satisfied customers. At this point, you’ll be in a position to lower your prices to penetrate the lower levels of the market.
If done correctly, this can be an effective counter-tactic against any competitor that tries to eliminate your advantage by using a penetration pricing strategy.
Examples of price skimming
Despite the self-evident charms of price skimming as a model, you’ll need a number of factors in place for it to be truly effective. Let’s take a look at some examples of price skimming that demonstrate what contexts are ideal for this pricing strategy.
The latest iPhone
This might not strictly be SaaS, but Apple’s approach to product pricing epitomizes price skimming in a way that almost anyone will recognize. With each new product offering, Apple’s prices for newly released products seem to be so high that they’re almost dissuasive — and yet, there are always queues outside Apple stores on iPhone release days.
That’s because Apple ticks all the boxes necessary for price skimming to work, including the following:
It has a huge number of customers who already see the brand as immensely credible and attractive.
It does not have immediate competition that’s able to undercut them.
It uses high pricing to signal the higher quality of its new product, a perception reinforced by the rest of its product array ( the components of which are all at various later stages of the skimming cycle).
Its expected sales volume is so high, as is its speed of developing new products, that lowering prices throughout the skimming cycle will have little to no effect on its overall sales volume.
Unit costs are not particularly an issue for a company the size of Apple.
As a result, Apple is perfectly placed to exploit the benefits of price skimming to the fullest. The company’s command of so many successful product launches and its corresponding price-skimming strategy is aspirational for any technology company.
The upper tiers of its market—which, in B2B SaaS terms, means enterprise-level deals with large companies—enabled Salesforce to make a tremendous amount of revenue quickly. Later on, it was able to scale down to accommodate smaller businesses that also clamored to use the cutting-edge CRM. Even now that CRMs are more normalized in the market, few companies have employed skimming in the wake of Salesforce’s successful strategy.
Trying out price skimming with Hubstaff
Replicating this kind of model for SaaS involves careful manipulation of your pricing page. At ProfitWell, we’re all about you getting your pricing page right, and if you settle on a price-skimming strategy, you’ll want to take extra care with how you set out your options.
Let’s look at a pricing page from Hubstaff and apply some of the tenets of price skimming to the company’s product array. Hubstaff has a popular product and a wide user base incorporating multiple market segments—so let’s see if a move to skimming would be a good fit for them.
Planning out your feature bundles is a fundamental of pricing, regardless of whether you’re planning to use price skimming as your main strategy. However, if Hubstaff decided to move from freemium to a price-skimming model, it would begin by moving the latest, coolest features of their product to the upper payment tier.
Once those features with the highest combined score in customer value and willingness to pay are in that upper bracket, Hubstaff could publicize this as its high-quality/high-price option. The logic from there dictates that as Hubstaff releases new product features, the older ones can be moved down to lower pricing tiers while the new features occupy that premium option.
Hubstaff certainly has the features and the range of buyers to suggest that skimming could work. But its product likely won’t cause word-of-mouth buzz, and many of its features hold equally high value for their up-market customers as to their down-market ones. In this case, a price-skimming strategy might hinder the company’s commercial momentum more than it would help.
When should you use a price-skimming strategy?
As established above, price skimming is most effective when your company can rely on the context around product launches being in your favor. While some of the most illustrious examples of successful price skimming are hardware as opposed to SaaS, the technology adoption life cycle still makes it a more than viable pricing strategy for SaaS companies. This is particularly true for those SaaS companies whose primary market targets are in the high-end, and who tend to cut enterprise-grade deals.
Having the latest technology holds powerful social currency. If your product can generate strong word of mouth, these early adopters can not only bring in plenty of revenue for you but also become a key source of recurring revenue.
When you shouldn’t use a price skimming
If your product boasts immediate competition, or if you have a product that isn’t appealing to the higher echelons of the market, then price skimming can prove to be an expensive waste. Likewise, if your product is not sufficiently unique to power a word-of-mouth reaction, then you may not feel all the benefits of a skimming strategy.
Without high quality and brand image, price skimming can impede your progress more than it can help. Incorporate skimming into your pricing strategy only when you have enough repeat buyers to generate dependable word of mouth and assurance that you can’t be easily undercut.
Does ProfitWell recommend price skimming?
Companies should approach price skimming with both caution and enthusiasm. For a company that has good, established credentials and a product capable of lighting a fire in the imagination of the market, with good draw distance from their immediate competition, it can be a fast track to huge profit. What’s more, it can also be a direct route to entrenched stability in your market area.
You should, however, carefully consider whether your company is best placed to accommodate the demands of price skimming. It is an exacting strategy, and one that requires a lot from your side. Even if it’s not the best pricing strategy for you, for now, don’t worry — there are plenty of others. And further down the line, when the proverbial cream is plentiful, you can think about skimming again.
By Patrick Campbell
Founder & CEO of ProfitWell, the software for helping subscription companies with their monetization and retention strategies, as well as providing free turnkey subscription financial metrics for over 20,000 companies. Prior to ProfitWell Patrick led Strategic Initiatives for Boston-based Gemvara and was an Economist at Google and the US Intelligence community.