Baird Hall
In 2007, Apple sold the first iPhone for $599. Ten weeks later it cost $399. The early buyers who paid full price were furious. The backlash pushed Apple to hand them a $100 store credit and a public apology. That is price skimming in one story.
The line for the first iPhone, New York City, 2007. Source.
We want to do the right thing for our valued iPhone customers. We apologize for disappointing some of you, and we are doing our best to live up to your high expectations of Apple.
What is price skimming?
Price skimming sets the highest price the keenest buyers will accept at launch, then steps it down over time to reach broader, more price-sensitive segments. The name comes from skimming cream off the top of the milk. You take the richest layer of demand first, then work down through thinner ones.
The cream line on a jar of milk. Source.
The logic rests on willingness to pay. A new product usually has a small group who want it badly enough to pay a premium on day one. Skimming charges them what they will bear, recovers development costs quickly, and only then opens the product to the price-sensitive majority.
Price skimming vs penetration pricing
Skimming has an opposite: penetration pricing. They are the two standard ways to price a new product.
| Price skimming | Penetration pricing | |
|---|---|---|
| Launch price | High | Low |
| Goal | Maximize early profit | Win market share fast |
| Best market | New, uncrowded, inelastic | Crowded, price-sensitive |
| Price over time | Falls | Rises |
| Main risk | Angering early buyers | Leaving money on the table |
The advantages of price skimming
- Fast payback. A high launch price recovers research and launch costs while demand is at its peak.
- A premium signal. The price itself tells the market the product is higher quality.
- Built-in segmentation. You capture the high-value buyers first, then the rest, charging each closer to what they will pay.
- A real-world test. Early adopters stress-test the product and spread word of mouth before the mass launch.
The disadvantages of price skimming
- It angers loyal customers. The people who paid full price feel penalized the moment it drops.
- It needs inelastic demand. If buyers balk at a high price, skimming just stalls the launch.
- It invites competitors. A fat early margin is an open invitation for rivals to undercut you.
- It fails in a crowded market. With alternatives a click away, few will pay the premium.
Real-world examples
Hardware makers run the clearest skims, because the price drop is public and easy to track.
The Sony PlayStation 3 launched in 2006 at $599 for the 60GB model, then slid to $299 by the 2009 Slim edition.
The original PlayStation 3. Source.
The Samsung Galaxy S20 arrived in 2020 at $999, and the next year's S21 reset the flagship down to $799.
The Samsung Galaxy S20. Image via GSMArena.
The Apple iPhone ran the most public skim of all. Apple put the cut in writing, announcing it in a press release two months after the phone went on sale.
Apple's own announcement of the iPhone price cut. Source.
A high launch price does not always come down. Apple launched the Vision Pro at $3,499 and later raised it, and the PlayStation 5 held then lifted its price. Those are skims at the launch end only, a high anchor to capture enthusiasts first.
When price skimming works
Skimming pays off under a specific set of conditions:
- a genuinely new or differentiated product
- buyers who will pay a premium to have it early
- a market not yet crowded with alternatives
- demand that holds up at a high price
The more the willingness to pay differs between segments, the more appropriate a skimming strategy becomes.
Without those conditions, a high price just slows adoption while competitors undercut you.
Price skimming in a subscription
Buy a product once and a later price cut does not bother you. You already own it. A subscription is different. You keep paying every month, so the price stays in front of you. When you cut the price, new customers pay less. Your early customers are still on the old higher rate.
Paying more than newer customers is a common reason to cancel. Price is already the reason customers give most often when they leave.
| Why customers cancel | Share of responses |
|---|---|
| Budget | 33% |
| Infrequent usage | 31% |
| Other | 18% |
| Expectations not met | 9% |
| Technical issues | 5% |
| A competitor | 4% |
Source: Churnkey survey of 2M cancellation responses.
A save offer at the cancel screen wins back a share of those customers.
Over the last 45 days, I've been able to lower churn by over 40% thanks to Churnkey's cancellation survey and win-back offers. As a busy CEO, I love how simple Churnkey makes it to integrate, manage, and track.
Churnkey helps you manage a price cut, so it wins new customers without costing you the early ones.
See if a price change is driving cancellations
Cancellation Insights show how many customers leave over price and which plans they are on, so you can tell whether a cut helped or backfired.
Offer early adopters a reason to stay
When an early subscriber goes to cancel over price, Adaptive Offers tests different discounts and settles on the smallest one that keeps them.
Adaptive Offers tests offers and learns the one that keeps each customer.
How to cut a price without losing customers
A price drop is healthy when you plan the descent instead of springing it.
Grandfather your early customers. Keep loyal subscribers on their old rate, or move them down to the new one before they have to ask.
Lower the price for new customers first. Test the cut on new sign-ups and watch how the base reacts before a broad change.
Give the early buyers something. A credit, a perk, or a founding-member badge turns a grievance into a reason to stay, the way Apple's $100 credit did.
Say it before they find it. Announce the change and the reason for it, so customers hear it from you rather than from a pricing page.
FAQ
What is price skimming?
A strategy that launches a product at a high price to capture buyers with the highest willingness to pay, then lowers the price over time to reach broader, more price-sensitive segments.
What is the difference between price skimming and penetration pricing?
Skimming starts high and comes down, aiming to maximize early profit from eager buyers. Penetration starts low and rises, aiming to win market share fast in a crowded market. They are opposite approaches to pricing a new product.
What are examples of price skimming?
New iPhones, PlayStation consoles, and Samsung Galaxy flagships all launch high and fall over time. The 2007 iPhone is the classic case, dropping from $599 to $399 within ten weeks of launch.
What are the advantages and disadvantages of price skimming?
It recovers costs fast, signals quality, and captures high willingness to pay early. Its risks are angering the customers who paid full price, attracting competitors, and stalling if demand is price-sensitive.
When should you use price skimming?
When your product is genuinely new or differentiated, competitors are scarce, and enough buyers will pay a premium to have it first. It works poorly in crowded, price-sensitive markets.
Does price skimming work for subscriptions?
It can, but the price descent is riskier than for one-time products, because subscribers keep seeing the lower price at renewal. Grandfathering early customers and communicating the change protect against the churn a cut can trigger.