A high-low pricing strategy is one that runs a substantial gap between the regular or listed price of any product and its promoted price. The high-low method is a retail price optimization strategy adopted to give consumers the perception of a bargain without any compromise on the perceived value of the brand.
The most important aspect of this strategy is establishing the high reference price that a buyer compares to the discounted sale price of the product. This comparison with the original price is what makes the consumer perception that the product is a bargain when it is offered at a substantially lower price.
A high-low pricing or dynamic pricing strategy can be used to promote sales in retail stores and D2C e-commerce businesses, but if the high price appears to be an inflated price for the customer without establishing the perceived value proposition, it may prevent sales. The high reference price should initially establish a high level of interest and curiosity in the product before prices are discounted at the point of sale. The low price of the product must be attractive and affordable for consumers, high enough to maintain high gross margins, but low enough that it does not appear that goods are being sold at too steep a markdown.
An important aspect that must be noted about the high-low pricing method is that the markdown and discount in the selling price are temporary. This ensures that the perceived value proposition of the product and brand is not compromised. The highest and lowest prices must still be in line with the overall value perception of the brand.
When is the right time to use high-low pricing?
- High-low pricing is also effective when demand for products is low and retailer stores need to attract customers over a longer period of time, perhaps to recover fixed and variable costs associated with high stock holding levels
- Large retail chains that operate several stores and high turnover may choose high-low pricing because it is cheaper than extensive advertising and promotional campaigns
- The pricing can also be adopted when products are nearing their shelf life and the inventory needs to be liquidated quickly. While this is the case with edibles, the same applies for other product categories as well – for example, fashion stores or online sellers running end of season sales to quickly sell out stock before the start of a new fashion season
- High prices are set when the market is relatively nascent and customers are willing to pay a premium. However, the high-low method might become useful when competition enters the market and the product has moved along the product life cycle; therefore there is a need to establish competitive pricing
Advantages of High-Low Pricing Method:
- Creates Excitement: When the price is reduced as per the high-low pricing method, this change is not permanent. This psychological pricing creates excitement because customers know that the price will rise once again
- Enhanced Sales: Various price levels offered especially during promotions and campaigns can generate additional sales and appeal to more price-sensitive consumers. It also helps cater to an aspirational market who can become brand advocates
- Turning Inventory: Slow-moving inventory at retail outlets can be liquidated quickly with a high-low pricing strategy
- Increased Footfall/Website Hits: The pricing strategy helps get more eyeballs and expand the customer base for the brand
The best example of using a high-low pricing strategy could be the fashion retail industry. When a new trend is in vogue, retailers would drop a new collection at a high price point. At this stage, all colours and sizes are usually available across all sales channels. As the fashion trends change and/or the season changes high-low pricing kicks in by offering slower selling colours and sizes at marked down or high-low prices.
For example, brands like Zara or H&M, often mark down their prices during festive periods or if they are running certain promotional campaigns. The price is marked up to the usual once the campaign ends.
The high low pricing method is used extensively by medium and small retailers. Especially now, in the internet era where shoppers are more capable of finding lower-priced items, its usage and relevance are widespread in the e-commerce space too.
Disadvantages of High-low Pricing Method:
- Customer Perception: When discounts are frequent, it could give consumers an impression that the product/brand may not be premium as perceived or positioned
- Customer Doubt: Low prices are often associated with lower quality. High-low pricing may seed doubts in the customers’ minds about the perceived quality of the product
- Timing: The high-low method will always have to be timed perfectly. Or else it could lead to lower margins, loss of sales at an otherwise higher price point
- Customer Understanding: A predictable high-low pricing strategy may make the loyal customer learn and wait for high-low pricing to set in for their purchase
Many of the disadvantages and risks involved in making a high-low pricing strategy could be minimized by using robust order management or product life cycle management software. It must also be kept in mind that the lowest selling price should always maintain the basic cost-plus pricing to recover operational costs while achieving a healthy margin. There is an urgent need to plan and implement a dynamic pricing strategy to remain competitive in this dynamic market. The use of intelligent software, like Increff Markdown Optimization, to devise high low price points can help companies make sound, data-driven decisions that will help maximize profits while keeping customers happy!
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