High-Low Pricing

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21 Aug, 2024

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High-low pricing strategy involves starting with a higher initial price and periodically offering sales or promotions to attract customers. This approach can instill a feeling of immediacy and stimulate purchases during the designated "low" price phases.

High-low pricing can attract customers—those willing to pay the higher price for the premium image and those who wait for sales to get a better deal. It helps clear excess inventory quickly during low-price periods, reducing carrying costs and potential losses from obsolete stock.

What Is High-Low Pricing (HLP)?

High-low pricing is a retail strategy involving setting higher initial product prices but offering frequent promotional discounts.
This approach aims to attract price-sensitive customers during sales while still generating profit from those willing to pay the higher base price.
High-low pricing relies on periodic sales and promotions, EDLP focuses on consistently maintaining lower prices, and everyday value pricing aims to balance value and regular pricing.
This strategy leverages the psychology of value perception among consumers. They perceive a more excellent value when they can obtain the same product for less.

High-Low Pricing Explained

High-low pricing is dynamic strategy businesses employ to attract customers and manage their purchasing behavior. This strategy combines price skimming and loss leader pricing elements to create a fluctuating pricing structure.

At its core, this strategy begins with the launch of a product at a premium price point, aiming to signal luxury, quality, or exclusivity. This initial higher price appeals to consumers associating elevated prices with superior products.

After the initial introduction, the company enters a series of promotional periods. During these periods, the prices of the products are reduced through various methods such as sales events, discounts, special offers, or bundling deals. These promotions are often short-term and have limited availability, creating a sense of urgency and prompting consumers to take action quickly.

One of the driving forces behind this strategy is the psychological principle of urgency and scarcity. This urgency is rooted in psychological principles of scarcity – customers are inclined to act when the chance seems fleeting, fearing a missed bargain.

In a way similar to a loss leader pricing, high-low pricing can also be used to draw customers into the store or onto an online platform. The appealing low prices on certain products act as a "hook" to attract customers. Once in the store, customers are more likely to explore and buy other items not on promotion, thus boosting overall sales.

This pricing strategy recognizes divergent buying patterns and preferences among customers. While some willingly pay the initial premium, attributing it to superior quality, others await promotional windows for their purchases. By catering to both segments, high-low pricing maximizes potential revenue streams.

Examples

Let us look at hypothetical and real-world examples to understand the concept better.

Example #1

Imagine a fashion retailer using high-low pricing for a new clothing line. They launch a trendy jacket at $150, positioning it as a premium item. After a couple of weeks, they introduce a weekend sale with a 30% discount, bringing the price down to $105. This strategy entices customers who value the perceived quality at the original price and eagerly await deals. The sale generates buzz, drawing in customers who purchase the discounted jacket and other items at regular prices, boosting overall revenue.

Example #2

Apple's approach to pricing the iPhone exemplifies the high-low pricing strategy. Yearly, Apple unveils new iPhone iterations, presenting various models at varying price tiers.

Typically, Apple debuts a flagship model boasting the latest cutting-edge attributes at a premium price. This variant targets consumers seeking top-tier quality and is open to paying more for innovative technology and aesthetics.

Upon releasing a new iPhone edition, Apple frequently decreases the price of the prior generation model. This approach caters to customers desiring a blend of performance and cost-effectiveness without necessarily pursuing the latest functionalities.

Furthermore, this strategy empowers Apple to optimize its revenue potential by capturing individuals with differing willingness-to-pay thresholds.

Advantages And Disadvantages

Let's understand the advantages of this pricing strategy-

Generating consumer interest: Promotional prices and discounts associated with this pricing strategy can create a sense of excitement among consumers. The prospect of getting a product at a reduced price or with added value can attract attention and encourage purchases. It can be particularly effective for attracting budget-conscious shoppers always looking for good deals.
Segmentation and targeting: This pricing strategy allows businesses to cater to different customer segments. Those willing to pay a premium can purchase at higher prices, while budget-conscious customers can take advantage of the lower promotional prices. This segmentation helps capture a broader range of consumers with varying preferences and purchasing power.
Competitive advantage: This pricing strategy allows businesses to respond more effectively to competitors' pricing strategies. By strategically adjusting promotional prices in response to market changes, a company can maintain a competitive edge and attract customers looking for the best value.

Let's understand the disadvantages of this pricing strategy-

Eroding Profit Margins: Offering frequent discounts and promotional prices can lead to lower profit margins, especially if the discounts are deep. Businesses must carefully balance attracting customers with lower prices and maintaining healthy profitability.
Brand Dilution: Over time, excessive discounting can erode a brand's perceived value. If customers come to expect discounts as a regular occurrence, they might hesitate to purchase at the total price, which negatively impacts the brand's image and premium positioning.
Customer Misperception: Constantly changing prices due to promotional periods might need to be clarified about the actual value of a product. It can lead to mistrust and frustration, as customers may need consistent and fair pricing.

High-low pricing vs Every Day Low Pricing (EDLP)

In retail pricing strategies, High-Low Pricing and Everyday Low Pricing (EDLP) offer distinct approaches to capturing consumer attention and driving sales. Let's understand the differences between them.

Aspect	High low pricing	Every day low pricing
Price Variability	Fluctuating prices with sales and promotions	Consistently low prices without frequent changes.
Consumer Behavior	It capitalizes on sales psychology and urgency.	Appeals to those seeking stable and predictable pricing.
Profit Margins	It has higher margins during regular pricing and lower during promotions.	Steady and predictable profit margins over time.

Frequently Asked Questions (FAQs)

1. What is the difference between skimming and high-low pricing?

Skimming and high-low pricing are distinct pricing strategies. Skimming involves initially setting a high price for a product to target early adopters and capture maximum revenue. In contrast, high-low pricing starts with a higher price. Still, it involves periodic sales and promotions to attract a broader range of customers, catering to those willing to pay a premium and those seeking discounts.

2. What makes a high-low pricing strategy appealing?

Sales and promotional activities linked with the high-low pricing strategy can attract customers to the establishment. This influx of visitors can result in heightened foot traffic, subsequently increasing the likelihood of more significant sales. The reduced prices during these promotional periods induce a feeling of immediacy and enthusiasm among customers, incentivizing them to make buying decisions.

3. What is a potential problem with a high-low pricing strategy?

A potential problem with a high-low pricing strategy is that it can erode customer trust if they perceive frequent price fluctuations as manipulative or insincere. It might lead to a negative impact on brand loyalty and long-term customer relationships.