Retail Strategy Secret #7: Price Skimming

skimming

Welcome to the seventh post in our series of “Retail Strategy Secrets”!  Here you will learn the angles, approaches, and tactics retailers are using every day to try and separate you from your hard-earned cash.  Understanding these unlocks the door to spotting great deals, and you never want to pass up a Dealicacy…

Price Skimming

Despite the sound of the phrase, “Price Skimming” has nothing to with embezzlement.  In fact, it isn’t even remotely shady and simply equates to testing the upper limits of what the market for newer products will bear.  An example of capitalism at its finest.

From a formal standpoint, Price Skimming is the practice of charging high prices for new products – especially at their introduction, and gradually lowering the price until the end of the product’s life cycle.

The objective of this approach is only slightly different from a manufacturer’s versus a retailer’s standpoint.  For the former it is to recover development costs as quickly as possible, before competitors compete and undercut price.  For the latter it is to (of course) boost profitability at peak points of demand for a product.  An example for both cases is… at the point of introduction of high-profile consumer electronics, such as iPads and iPhones.

Although this approach has been standard for many years, it is becoming more and more difficult to sustain for any great length of time. Factors cutting into the price skimming approach include the Internet (sharing of information and easy comparison), the rise of industrial powers such as China and Vietnam (lower manufacturing costs), and recent economic conditions (where consumers aren’t as willing to pay premiums for luxury).  These, and many other competitive factors create retail where environment product life cycles shrink and even begin at a point past the traditional “grand introduction” phase.

A very recent (and likely familiar) example of compressed product life cycles can be found in the world of television. Just this week, LCD TVs can be found prominently displayed in ads for Target, a retailer not usually known as a specialty electronics retailer.  High quality 40″ 1080p Hi-Def with assorted features can be found for under $700.  What is curious is that it’s not a typical drive time.  Back to school just ended, Thanksgiving and Holiday shopping is still a few months away.  Just two years ago the masses would have been excited to see similar products for $1800 during pre-Super Bowl campaigns!

An $1100 difference in revenue in such a short retail time frame, especially noting just how much competition is out there (it will easily take all of your fingers to count the many brands of LCD TVs available), Plus the timing (not a typical drive time) puts tremendous pressure on retailers in general to much profit. Let alone use price skimming as a stand-alone strategy.

To see this all play out in real time from the beginning, watch how Sony’s new 3-D technology performs after it hits the market this Holiday season.  It will definitely be introduced with much fanfare and an attempt at a premium “skim” price.  With any luck for Sony, prices will likely remain high until after football season, with cracks in the skim strategy beginning to appear end-of summer.  Depending on consumer sentiment and the economy, this time next year may make this nearly brand-new technology yet another bargain.

Given these factors, it might just be the best idea (again) to employ the Biggest Money-Saving Secret Of them All if you are in the market for one of these TVs.  While you are doing that, make sure you sign up for the Dealicacy Newsletter – we’ll be sure to alert you when the optimal time comes around to snag one of these (and many other goodies as well).

See you in just a couple short days – I have a great post on “Penetration Pricing” in the works!

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