Any business finds it difficult to set prices for their goods and services that fall within the Goldilocks “just-right” range. If you set your prices too low, you run the risk of losing money at the point of sale. However, if you set your prices too high, you run the risk of losing all of your business to your rivals. Companies around the world are utilizing the pricing science at their disposal more and more, switching between different pricing strategies as the situation demands. There are many pricing models and strategies available today that can help you determine the prices that will best serve the specific set of business goals that your organization has. In this article, we examine just one type of pricing strategy among the numerous others that are currently offered to businesses. High Low Pricing Strategy Explained: The Pros & Cons
Over the past 10+ years, Pricefx has helped hundreds of businesses optimize their pricing. During that time, we’ve discovered that no two companies have the same needs when it comes to a pricing strategy solution. Some of you may be eager and motivated to immediately implement a high low pricing strategy for your company after reading this article. However, some of you will almost certainly decide, ‘No way. High Low Pricing is definitely not for me. And that’s fine, but it would be great to learn and know for sure, wouldn’t it?
The High-Low Pricing Strategy
When should you use high-low pricing?
If a business wants to sell a large amount of inventory, high-low pricing may be used. This is due to the fact that they have a wide selection of products from which to choose, giving them the opportunity to rotate their discounted items more frequently. Companies can also use high-low pricing for seasonal goods, like holiday-specific items or goods that customers can only use during specific times of the year, by reducing the cost of such goods once their season has passed.
High-low pricing can also be advantageous for companies that sell goods with expiration dates because it allows them to tailor discounts and promotions to the goods they need to move more quickly. Businesses that notice which products their customers seem to buy more frequently may do the same, offering discounts on supplementary or auxiliary goods to entice customers to pay full price for their preferred goods.
What is high-low pricing?
When a company uses the high-low pricing strategy, it charges high prices for the majority of its products while charging low prices for a select number of them. By promoting low-priced goods while still selling high-priced goods in the same location, high-low pricing can assist businesses in boosting their revenue.
Companies can modify their use of low prices by changing which products they offer at a low price, even though some more expensive products may continue to be priced at high levels over time. Companies can do this by lowering the price of specific products for predetermined periods of time, which they can then apply to other products later.
Advantages of high-low pricing
Here are a few advantages to high-low pricing:
Increased profitability
High-low pricing has the potential to boost a company’s overall profitability. This happens when customers who are given the chance to buy products at a discounted price also buy things at full price while shopping. Customers might visit a business with the intention of buying an item that they see being sold at a discount and end up making additional purchases after browsing the store, especially in retail businesses that keep their sales floor stocked with inventory.
Built-in marketing strategy
The benefit of using the pricing model comes from having a solid marketing plan because businesses that use high-low pricing must consistently advertise the products they intend to sell at a discounted price. This is a result of businesses frequently switching the products for which they lower prices so they can use the same promotional tactics or coupon codes for the next round of discounted goods. A company can save time and money by already having a marketing strategy in place rather than having to create one from scratch.
Expanding customer base
High-low pricing also has the potential to draw in new clients for a business. This is due to the fact that a business that uses high-low pricing frequently provides promotions or coupons that they publicize, which may entice clients to visit a business even if they have never done so before. Businesses that successfully employ high-low pricing stand a better chance of keeping their current clients, who can come back to make more of their typical purchases and discover new discounted items as a company releases them.
Disadvantages of high-low pricing
Here are some disadvantages to high-low pricing:
Consumer behavior
High-low pricing may have one drawback in that it depends on how customers act when they enter a store to make purchases. While a business can conduct market research and track the typical purchases of its customers, it might not be possible to predict exactly which products customers will want to buy. This could lead to fewer customers than expected choosing to purchase more expensive products, even if they are located close to discounted ones.
Market comparisons
High-low pricing may also have a negative impact on a company’s ability to compete with other businesses in its industry. This is due to the possibility that customers may compare prices with other stores or businesses and decide to shop at a company with lower overall prices if a business sets the prices of its more expensive items too high above market value. Companies can help with this by carefully selecting the prices of their more expensive items and attempting to prevent a significant price difference from those at other businesses that are similar to theirs.
Cost of advertising
Companies that use high-low pricing may invest significant sums of money in marketing or advertising campaigns because it typically relies on constant advertising of discounted goods. This is necessary for high-low pricing because the low-priced items change frequently, making it a recurring expense for companies that advertise widely or switch out their discounted items more frequently.
Examples of high-low pricing
Two companies that might employ high-low pricing are listed below:
Example 1
High-low pricing may be used by a grocery store to attract customers to their stores, which typically have a lot of inventory to sell. They can do this by providing discounts or coupons for specific products, positioning those products near products with higher prices or in the store’s back. This could tempt customers to peruse the more expensive items in a grocery store while they search for the less expensive items that initially drew them in.
Example 2
A retailer of phones and mobile devices can use high-low pricing to change their prices in response to emerging technological trends and market conditions. For instance, a phone retailer may set a high price for a new smartphone model when a brand releases it because it is new and may have a higher market value. Then, in order to draw customers, they can offer a promotion or discount on older models of the same phone as well as on other phones nearby their new products.
As many customers who need to buy a phone might also need phone service, phone retailers can also use high-low pricing by charging higher prices for their service plans while offering lower prices for the devices they sell.
FAQ
What is high-low pricing example?
Major retailers like Macy’s and Nordstrom, as well as niche businesses like Adidas and Nike, frequently use high-low pricing. Prices are set high, but they periodically provide discounts to customers through sales, promotions, or coupons.
What are the 4 types of pricing?
High-low pricing, which is also known as the “hi-lo” or “skimming” pricing method, is a typical retail pricing strategy in which a good (or service, in some cases) is introduced at a higher price point, then gradually marked down as demand declines.
Why is high-low pricing good?
Value-based, competition-based, cost-plus, and dynamic pricing are the four main pricing strategies that are frequently employed, depending on the industry and business model in question.
