To Skim or not to Skim: Studying the Optimal Pricing Strategy for Technology Products

Pricing of technology products often follows a skimming strategy in which a firm charges the highest price at product launch then reduces the price over time to attract additional buyers. Price-skimming has not been adequately examined in the literature related to technology products. Most pricing models proposed in the literature consider only initial product purchases while ignoring repeat purchases. However, for technology products, frequent upgrades often result in substantial repeat purchases. To fill this void, we develop an optimization model that accounts for both initial and repeat purchases. We find that the effectiveness of price skimming is highly dependent on the rate of repeat purchases. When the repeat purchase rate is low, firms may be better off delaying price reduction to accumulate more profit earlier in the product lifecycle, thus compensating for the decline in sales that occurs later in the lifecycle. For example, price skimming may not be the optimal pricing strategy for fad products with low repeat-purchase rates due to the product losing popularity in a short time period. Furthermore, contrary to common expectations, in markets highly sensitive to price changes firms may get away with charging a higher introductory price but must decrease the price over time to motivate sales.