What is High Low Pricing?
High low pricing also referred to as the“skimming” pricingmethod or the “hi-lo” pricing method is a popular pricing strategy commonly used by retail stores. In high low pricing, retailers first introduce the product at a high price point. Gradually when demand decreases they provide the same product at a discounted or lower price.
So over a period of time, the products price alternatively fluctuated between “high” and “low” price. This pricing strategy is especially suitable for small and medium-sized retailers.
The rationale behind this strategy is simple. In general, customers are more attracted towards discount offers - with the x% off sign particular tempting buyers to make a purchase.
The reason why this strategy might work is simple. Firstly, the customers probably are unaware of a product's regular market price, so the “discount” sign is considered as a “lower price”. Also, consumer loyalty plays an important role in customer retention - so if a customer is loyal to a brand or retailer they will keep buying from there regardless of high pricing or a sale.
How does it work?
Simply put high-low pricing strategy is when retailers alternatively choose the higher or lower prices for a product. But the when and why reason to select a price is what makes this strategy very efficient.
A high low pricing strategy essentially combines 2 different pricing strategies - price skimming and loss leader pricing. In price skimming strategy, a seller sets a high price for the product during the launch and then gradually decreases it. On the other hand, loss leader pricing is when a store prices its goods below the cost price to stimulate sales.
Similar to price skimming, high low pricing starts out with a high price. But then as the demand decreases to stimulate more sales - the model shifts to follow the loss leader pricing strategy. So now to know drive more purchases the seller reduces the price of the product. In case of high low pricing, this is usually during a promotional period.
The strategy works because it gives consumers a bargained deal. So in a sense, the initial price sets the value of the product whereas the relatively lower price gives a sense of bargain to the customer. It is also a good strategy to get out of the slump period when demand is low.
Additionally, the strategy serves the following purpose
- Increase revenue
- Grow customer base
- Generate additional sales compared to the regular sales generated without a sale
- Overall, generate excitement among the customer base so they not only make a purchase but also look out for the next sale event.
- Sell inventory products that increase the inventory load and are not selling as regularly as estimated.
Effect of High low pricing on Profits
As the price changes, it surely will affect the profit margin of a product. So when a price of a commodity goes down the unit profit also decreases. But due to the promotional event, the number of purchases also increase.
So, net-net, the total weekly profit increases for a particular period. But since the price alternates between low and high, eventually, the weekly sales fall to the regular value.
High Low Pricing and Reference Price
The reference price is essentially the price buyers directly compare the discounted price with. Consumers perceive that they are getting a bargained deal if the discounted rate is lower than the reference price they are considering.
It is an important concept in high low pricing. As the entire strategy relies on relative pricing differences of the commodities. Let's take an example to understand this better. Suppose, the starting price of a product is $20, and during a promotional event the price is set as $10 which is a 50% discount. The normal selling price of the same products is in fact $15. So the reference price will be $15 in this case.
High Low Pricing vs Everday Low Pricing
The two main pricing models that most companies use are high low pricing or everyday low pricing. The everyday low pricing model is when a retailer consistently provides low prices to their customers rather than alternating between “high” or “low” prices. Such retailers rarely rely on promotional events or exclusive discounts and offer to pump their sales revenue.
Instead, this strategy relies on a steady flow of loyal consumers who choose to purchase at the store because of their low prices. Additionally, these retailers save on marketing initiatives, as one campaign is sufficient to convey the relevant info.
This is different from high low pricing, as this strategy heavily relies on the promotional event to gain more traffic to the stores - diametrically opposite to how everyday low pricing strategy works.
Examples of High Low Pricing
High low pricing is applied by many retail stores and businesses. Let’s understand it better by taking an example.
All smartphones are introduced at a very high price during their launch and eventually their price decreases as the demand decreases. The sellers utilize the initial excitement around the product and its latest features to sell as many units as possible at a high price. Most sellers are enthusiastic to buy a new smartphone during its launch.
This dynamic is clearly displayed when every time Apple launches a new iPhone. The launch creates enough buzz so people come flooding in to buy the product.
But eventually, when these products are sold at a lower price during a discount period, customers looking for lower cost buy them. This is a win-win situation as both the launch and the discount period provide peak revenue periods. This is almost a perfect example of high low pricing.
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