High-Low Pricing Meaning, Benefits, Disadvantages

High–low pricing is a type of pricing strategy adopted by companies, usually small and medium-sized retail firms, where a firm initially charges a high price for a product and later, when it has become less desirable, sells it at a discount or through clearance sales.

Prospective customers may be unaware of a product’s typical market price, or have a strong belief that “discount” is synonymous with “low price”, or have strong loyalty to the product, brand or retailer. High–low pricing strategy is effective because of consumer preference and shopping frequency.  Consumers with higher income strongly prefer the high-low pricing and they shop frequently in the brand stores they like.

Usage

There are many big firms using this type of pricing strategy (including, in North America, Reebok, Nike, and Target). Competition in shoemaking and the fashion industry is partly through high–low pricing (for example Macy’s, Nordstrom). But some firms will not provide discounts and work on a fixed rate of earnings following everyday low price strategies to compete in the market.

An alternative way to use high–low pricing is to increase the price for a short time, sometimes as much as 500%, after which it is “discounted” to what its normal selling price. After the price is reduced to the “sale” price, it may often stay at that price for a long time, sometimes longer than two weeks, after which customers may begin to question whether the reduction is genuine. Artificial discounts of this sort are illegal in the United Kingdom.

Advantages of High-Low Pricing

A key advantage of using the high-low pricing method is that, when properly implemented, it can yield substantial profits; but only if customers buy multiple additional items that are fully priced. A further advantage is that the high-low method essentially becomes the marketing method for the business, since it must constantly advertise a selection of low-price items.

Built-in marketing strategy

Because companies that use high-low pricing need to consistently advertise the products they plan to sell at a discounted price, the advantage of having an established marketing strategy accompanies the use of the pricing model. This results from the constant changing of which products a company lowers the prices for, as they can reuse the marketing strategy from one round of promotions or coupons for the next batch of discounted products. Having a marketing strategy ready to use can save a company time and money they might otherwise need to develop one.

Increased profitability

One advantage of high-low pricing is that it can increase a company’s overall profitability. This occurs when customers who are presented with the opportunity to purchase products at a decreased price also purchase full-price items while shopping. Especially in retail businesses that keep their sales floor stocked with inventory, customers might visit a business with the intention of purchasing an item that they see being sold at a discount and end up making additional purchases after browsing the store.

Expanding customer base

Another advantage to high-low pricing is its potential to attract new customers to a business. This is because a company that uses high-low pricing typically offers promotions or coupons that they advertise to the public, which might encourage customers to visit a business even if they have not done so before. Companies that effectively use high-low pricing can also have a greater chance of keeping their existing customers who can return to repeat their usual purchases and explore new discounted items as a company releases them.

Disadvantages of High-Low Pricing

A business using high-low pricing will need to contend with several disadvantages. First, if a business does not place its low-price items properly, or is dealing with price-sensitive shoppers, it may find that it loses money on its low-price promotions. Second, if customers become aware that the bulk of the products offered by a business are higher than the market rate, they will be more likely to shift their spending loyalties elsewhere. And finally, it can be expensive to run a perpetual series of marketing campaigns to tout the latest low prices.

Market comparisons

Another possible disadvantage to high-low pricing is how a company might compare to other similar businesses in terms of how they price their items. This is because if a company sets the prices of its more expensive items too high above market value, there is potential for customers to compare pricing with other stores or companies and choose to shop at a company with lower overall prices. Companies can help this by carefully choosing the prices of their more expensive items and trying to prevent too large of a discrepancy with prices at other similar businesses.

Consumer behavior

One potential disadvantage to high-low pricing is that it relies on the behavior of consumers who visit a business to make purchases. While a company can perform market research and observe what their customers typically purchase, it might not be possible to predict which products customers want to buy with complete accuracy. This might result in fewer customers than anticipated opting to buy more expensively priced products, even if they’re situated close to discounted ones.

Cost of advertising

As high-low pricing typically relies on continuous advertising of discounted products, companies who use it might spend large sums of capital on marketing or advertising campaigns. This is necessary for high-low pricing, as the products offered at a low price change regularly, which means that it can be an ongoing expense for businesses who advertise heavily or change their discounted products more frequently.

Evaluation of High-Low Pricing

The high-low pricing method is widely used, but discerning shoppers in the Internet era are more capable of spotting lower-priced items elsewhere, and so will only buy the low-price items and will avoid the high-price items. Also, a business that persistently offers high prices on the bulk of its products will not garner much customer loyalty. Competitors that use everyday low pricing for all of their products can compete effectively against this strategy.