What is a High-Low Pricing Strategy?A high-low pricing strategy is a common retail pricing strategy where a product (or service, in some cases) is introduced at a higher price point, and then gradually discounted and marked down as demand decreases. Although the concept seems relatively simple, knowing when (and how) to use a high-low pricing strategy can be difficult. In some cases, this retail pricing strategy is also referred to as the “hi-lo” or “skimming” pricing method.
Examples of High/Low PricingHigh-low pricing is often applied to brand-new products that are just being introduced to the market:
Example 1: SmartphonesVirtually all smartphones (especially flagship and mid-range phones) are introduced at a high price point and gradually discounted as the hype dies down (and new models are announced). While Apple popularized this approach to smartphone pricing — this is now standard across most brands including Samsung, Google, Huawei, etc.
Example 2: Video Game ProductsWhile not all video game products use this strategy (video game accessories like controllers almost never drop in price) — this is the primary pricing strategy for mass market game consoles and game software. Game publishers introduce their products at peak price (59.99 USD / 79.99 CAD for a video game), only discounting as demand wanes (after weeks, months, or years, depending on the product). The major exception to this strategy is Nintendo — which almost never discounts its products, even after years of being on the market.
Example 3: Mid-Range Sports ApparelHigh-low pricing is the preferred strategy for many mid-range sports apparel retailers (especially those found in North American malls). New designs are released at peak prices at the onset of a new season and are discounted as demand wanes. This strategy does not extend to high-end sports goods (professional equipment, official team jerseys, etc.) or sports departments in EDLP retailers.
What is the Benefit of High-Low Pricing?High-low pricing is a particularly good pricing and marketing technique when you don’t have any sales history to base pricing decisions. Your goal as a retailer is (typically) to increase profitability, so it’s reasonable to start your pricing strategy by maximizing your gross profit. But because calculating the optimal price point for a new product is very difficult without sales history, high-low pricing allows you to start high and keep lowering the price until you get to a point where the Sales x Gross Margin results in the most absolute profit.
- As the Price goes down, so does the Unit Profit
- At the same time, Sales increase (because more people buy at the sale price)
- Total Weekly Profit increases for several weeks (because the Sales increase is more significant than the Unit Profit decrease)
- Finally, Total Weekly Profit quickly falls at the end (because Unit Profit continues decreasing and Sales stop increasing)
- Once you offer a product at a certain price to your customers, increasing the price of the product later on in the season can be very difficult
- In some cases, when demand unexpectedly spikes for a product (like hand sanitizers during a pandemic) significantly increasing the price of this product may hurt your business reputation (or may even be illegal)
- On the other hand, few will complain about a decrease in price
When Not to use the High-Low Pricing StrategyA high-low pricing strategy would not be effective in several situations:
Commodity PricingIf the item is a commodity, the price will typically fluctuate depending on the retailer’s cost to acquire the product, as well as overall demand for the product. In this situation the market sets the price, and introducing the product at a high price will not generate any sales since customers intuitively know how much the item should cost. For example, you can’t simply start selling cucumbers at $10 a piece.
EDLP Strategy (Everyday Low Pricing Strategy)Some retailers compete primarily on price. They typically employ an “Everyday Low Price Strategy” (EDLP). These discount retailers are focused on keeping prices lower than the competition, so they will often offer price matching and consistently maintain low prices throughout the entire season.
Luxury Brand PricingStrong brands in this segment will typically stay away from high-low pricing because their prices are strategically high, to begin with. Reducing prices may damage the perception of luxury among consumers. Some high-end retailers destroy unsold inventory at the end of the season instead of marking it down — for this very reason.
Loss Leader and Market Penetration Pricing Strategies“Market Penetration” and “Loss Leader” strategies are also at odds with high-low pricing. Loss Leader pricing is when a retailer intentionally discounts the price of a product (sometimes below cost) in order to generate extra demand and traffic into their store (hoping consumers will purchase additional products on their visit). Market Penetration is when retailers intentionally lower the price of a product in order to gain market share over competitors.
Where Does High-Low Fit in the Big Picture?High-Low pricing is a relatively simple strategy that relies on a bit of guesswork. Retailers may prefer to use it when it is too difficult to calculate, set, and manage optimal prices throughout the season for each product on an individual basis. Although it can’t compare to a more comprehensive pricing plan — it’s useful in this particular instance. To put this in perspective, if you have 100 stores and 10,000 products, you are looking at 1,000,000 Store/SKU combinations (each with its own demand curves and optimal price). Effectively managing prices for so many store/SKU combinations is impossible for a human. So it’s no surprise why some retailers use simpler rule-based pricing strategies (like high-low) to manage their product prices. But despite its simplicity, high-low doesn’t provide a foolproof approach to pricing, and its success is (at least in part) determined by guessing correctly:
- How high should the initial price be?
- The frequency of prices drops
- How big should the price drops be?
- The quantity of inventory needed for each price point
- What should the pricing floor be?
Implementing Advanced Pricing StrategiesAs millions of Store / SKU combinations move through their own life cycles, prices may need to be adjusted in several stages (initial, regular, promotional, and markdown pricing.) Purpose-built artificial intelligence like Retalon (designed and made for retailers) can do this completely automatically. Retalon’s retail AI engine is able to look at dozens of critical factors that affect demand:
- Price elasticity of the product
- Effect of sales promotions
- Competitor pricing
- Price zones
- Cannibalization of related products
- And much more
Want to see our advanced pricing solution in action? Book a free demo today or contact our team if you have any questions.