Introduction
High-low pricing is a retail pricing method where a product is supplied at a higher price point and then progressively dropped and marked down as demand drops. It is referred to as the “hi-lo” or “skimming” pricing approach.
While the concept is simple, determining whether and how to use a high-low pricing approach can be difficult.
Potential customers may not know the average market price of a product; they may genuinely think that a “discount” equals a “low price;” or have an intense connection to the product, brand, or store.
High-low pricing works because it is popular and customer purchases are consistent. High-income consumers tend to select high-low pricing and visit stores carrying their preferred brands.
Thus, throughout time, the commodity price fluctuated between “high” and “low” values. The logic behind this strategy is simple. Discount offers tend to attract customers more, and the x% off sign is a decisive attraction for buyers.
This strategy could work for a straightforward reason. Since customers sometimes aren’t aware of a product’s typical market cost, the “discount” sign is interpreted as a “lower price”.
Another element impacting customer retention is brand or retailer loyalty, which refers to a consumer’s willingness to keep shopping with them through discounts or high pricing.
Let us start with understanding pricing strategies.
What Are Pricing Strategies?
A complex set of computations, research, and risk-taking skills define a product or service’s price, which is the value attributed to it.
You can determine what you can and should charge in most marketplaces by looking at the prices of your rivals.
Assessing how your product or service compares to theirs and the importance your target market places on the features and benefits you provide may give you a good idea of how much your offer should be worth.
It’s ideal to set your prices close to your competitors since potential customers won’t instantly write off your products as being too expensive. You’ll also avoid the risk of starting a pricing war by undercutting rivals.
A pricing strategy takes into account input costs, trade margins, customer willingness to pay, and competitor activity. The intended clientele consists of both competing companies and the listed clients.
High-Low Pricing vs. Everyday Low Pricing
Everyday Low Pricing is a technique where a company maintains its prices particularly low to express its brand identity. The approach is effective for brands aiming to present themselves as “discount brands.”
Everyday low pricing relies on a business commencing with low prices and persistently keeping them low—contrary to commencing with high prices and gradually reducing them.
High-Low Pricing vs. Loss Leader Pricing
With Loss Leader pricing, a company intentionally and frequently decreases the price of specific products significantly to stimulate consumer interest. The difference between this approach and high-low pricing is how abruptly and markedly a company reduces its prices. High-low pricing favors a gradual decline. In contrast, Loss Leader pricing is swifter and more drastic.
High-Low Pricing vs. Market Penetration
Market Penetration transpires when a company purposely decreases its prices to undercut competitors and enhance its market share. It encompasses a comprehensive endeavor and collective price reductions across different products—while high-low pricing is comparatively less intricate and specific to individual products.
Examples of High Low Pricing
High-low pricing is commonly employed with newly introduced products in the market:
Example 1: Smartphones
Nearly all smartphones, particularly flagship and mid-range models, enter the market at a high price point and are subsequently discounted over time as excitement diminishes and newer models are announced.
Although Apple popularized this pricing strategy for smartphones, it has become standard practice among Samsung, Google, Huawei, and others.
Example 2: Video Game Products
While not all video game products follow this strategy (for instance, video game accessories like controllers rarely see price reductions), it is the primary pricing approach for mass-market game consoles and game software.
Game publishers initially release their products at full price (e.g., USD 59.99 / CAD 79.99 for a video game) and then lower prices as demand decreases, which may occur after weeks, months, or even years, depending on the product.
Example 3: Mid-Range Sports Apparel
Many mid-range sports apparel retailers, particularly those in North American malls, prefer high-low pricing. They release new designs at premium prices at the beginning of each season and offer discounts as demand diminishes.
How Does High-Low Pricing Maximize Sales?
High-low pricing maximizes sales through several key strategies:
Increased Profitability
One of the main benefits of a high-low pricing strategy is its potential to boost your company’s overall profitability. When customers are offered to purchase products at reduced prices, they may also buy full-price items during their shopping experience. This increased sales potential is particularly evident in physical retail stores, where customers often make additional purchases after initially seeking discounted items.
Creates Brand Excitement and Boosts Store Traffic
Businesses utilizing a high-low pricing strategy can generate considerable consumer excitement around their brand due to the “buy it while it’s on sale” buzz it creates. Moreover, customers are naturally drawn to online and offline stores when price reductions are announced for previously high-priced products. The more the discount, the more likely consumers are to share the price drop update with their social circles.
Bundle Products and Clear Inventory
Bundling out-of-season products can encourage impulse buys, helping to clear inventory and reduce storage costs. Encouraging shoppers to purchase multiple items through offers like “buy 2, get 1 free” directs them to the clearance rack while increasing sales volume and revenue.
A Sustainable Marketing Strategy
Businesses employing a high-low pricing strategy must consistently promote the products slated for discounted prices, establishing a marketing strategy to complement the pricing approach. By rotating through different products for price reductions, the marketing strategy from one promotion or coupon cycle can be reused for subsequent batches of discounted products. This pre-existing marketing strategy can save time and money compared to creating a new strategy for each promotional period.
Expand Your Customer Base and Retain Existing Customers
Another advantage of a high-low pricing strategy is its potential to attract new customers to your business. Advertised discounts and promotions associated with this strategy may entice customers who have never patronized your business before to give it a try. Additionally, businesses implementing a high-low pricing strategy may have a greater chance of retaining existing customers who continue to make regular purchases while exploring new discounted offerings.
When to Avoid Applying the High-Low Pricing Method
In a few scenarios, a high-low price approach might not work:
Commodity Pricing
If the product is a commodity, the price will usually change based on the total demand for the goods and the retailer’s acquisition costs.
In this case, the price is decided by the market, and charging a premium for the goods will not increase sales since consumers are aware of its fair pricing. For instance, you can’t just start charging $15 for an apple.
Everyday Low Pricing (EDLP) Strategy
Certain stores compete based on pricing. Generally, they use an Everyday Low Price Strategy. Price matching and maintaining low pricing for the duration of the season are practices among these relatively inexpensive stores, which prioritize maintaining lower prices than their competitors.
Premium Brand Pricing
Strong brands in this market usually avoid high-low pricing since their starting prices are deliberately high. Price cuts can harm consumers’ perceptions of luxury. For this reason, some stores destroy unsold merchandise at the end of the season rather than taking it down.
How to Put Advanced Pricing Strategies into Practice to Maximize Sales
Prices may require adjustments across different stages for each product. When it becomes too challenging to ascertain, establish, and manage optimal seasonal prices for each product individually, retailers may opt to implement it. An artificial intelligence system designed for retailers can automate processes such as:
- Seasonality and price elasticity
- Competitors’ pricing
- The effectiveness of marketing campaigns
- Price segmentation
- The cannibalization effect of complementary products
To optimize gross margin and profitability while avoiding excessive inventory at the end of the season or stock shortages for high-demand items. The system will then determine the optimal price or discount for each product at every location.
Conclusion
The high-low pricing strategy offers an excellent method for building excitement while maximizing sales gradually. If managed properly, high-low pricing proves to be a successful approach in boosting store visits and online traffic, enticing customers to explore other offerings from the retailer by diverting their focus away from a single item. Visit Rubick.ai to find cutting-edge solutions tailored to your needs.
