What is a High-Low Pricing Strategy? (Examples, Pros, Cons)

Also referred to as “hi-lo” or “skimming” pricing method, high-low pricing is a common retail pricing strategy where a product (or service, ... AdvantagesofaHigh-LowPricingStrategy(WithExamples) 25MayAdvantagesofaHigh-LowPricingStrategy(WithExamples) Postedat15:16h inBlog by RetalonPredictiveAnalytics TableofContents WhatisaHigh-LowPricingStrategy?ExamplesofHigh/LowPricingExample1:SmartphonesExample2:VideoGameProductsExample3:Mid-RangeSportsApparelWhatistheBenefitofHigh-LowPricing?WhenNottousetheHigh-LowPricingStrategyCommodityPricingEDLPStrategy(EveryDayLowPricing)LuxuryBrandPricingLossLeaderandMarketPenetrationPricingStrategiesWhereDoesHigh-LowFitintheBigPicture?ImplementingAdvancedPricingStrategies WhatisaHigh-LowPricingStrategy? Alsoreferredtoas“hi-lo”or“skimming”pricingmethod,high-lowpricingisacommonretailpricingstrategywhereaproduct(orservice,insomecases)isintroducedatahigherpricepoint,andthengraduallydiscountedandmarkeddownasdemanddecreases. Althoughtheconceptissimple,knowingwhen(andhow)touseahigh-lowpricingstrategycanbedifficult. Sowhenisthisstrategymostuseful? Discoverhowtopretailersareincreasingtheirmarginsbyupto60% Getthe7pricingtipsleadingretailersusetomaximizetheirprofits. DownloadFreeGuide ExamplesofHigh/LowPricing High-lowpricingisoftenappliedtobrandnewproductsthatarejustbeingintroducedtothemarket: Example1:Smartphones Virtuallyallsmartphones(especiallyflagshipandmid-rangephones)areintroducedatahighpricepoint,andgraduallydiscountedashypediesdown(andnewmodelsareannounced).WhileApplepopularizedthisapproachtosmartphonepricing—thisisnowstandardacrossmostbrandsincludingSamsung,Google,Huawei,etc. Example2:VideoGameProducts Whilenotallvideogameproductsusethisstrategy(videogameaccessorieslikecontrollersalmostneverdropinprice)—thisistheprimarypricingstrategyformassmarketgameconsolesandgamesoftware.Gamepublishersintroducetheirproductsatpeakprice(59.99USD/79.99CADforavideogame),onlydiscountingasdemandwanes(afterweeks,months,oryears,dependingontheproduct). ThemajorexceptiontothisstrategyisNintendo—whoalmostneverdiscountstheirproducts,evenafteryearsofbeingonthemarket. Example3:Mid-RangeSportsApparel High-lowpricingisthepreferredstrategyformanymid-rangesportsapparelretailers(especiallythosefoundinNorthAmericanmalls).Newdesignsarereleasedatpeakpriceattheonsetofanewseason,andarediscountedasdemandwanes.Thisstrategydoesnotextendtohigh-endsportsgoods(professionalequipment,officialteamjerseys,etc.)orsportsdepartmentsinEDLPretailers. WhatistheBenefitofHigh-LowPricing? High-lowpricingisaparticularlyusefulpricingandmarketingtechniquewhenyoudon’thaveanysaleshistorytobasepricingdecisionson. Yourgoalasaretaileris(typically)toincreaseprofitability,soit’sreasonabletostartyourpricingstrategybymaximizingyourgrossprofit. Butbecausecalculatingtheoptimalpricepointforanewproductisverydifficultwithoutsaleshistory,high-lowpricingallowsyoutostarthighandkeeploweringthepriceuntilyougettoapointwheretheSalesxGrossMarginresultsinthemostabsoluteprofit. Thegraphaboveshowsahypotheticaluseofhigh-lowpricing: AsPricegoesdown,sodoestheUnitProfitAtthesametime,Salesincrease(becausemorepeoplebuyatthesaleprice)TotalWeeklyProfitincreasesforseveralweeks(becausetheSalesincreaseisbiggerthantheUnitProfitdecrease)Finally,TotalWeeklyProfitquicklyfallsattheend(becauseUnitProfitcontinuesdecreasingandSalesstopsincreasing) Assumingthereisnothingelseimpactingyourproductdemand(likeseasonality),thehigh-lowstrategycantheoreticallyhelpyoudiscoveranidealpricepointforaparticularproduct.Inourhypotheticalexampleabove,thiswouldhavebeenWeeks7–8,whereWeeklyProfitwashighest. Thisstrategyofincrementalmarkdownsisalsousedasaproductisnearingtheendofitsseason.Forexamplefashionretailersmaystartincrementallyloweringthepriceofwinterjacketsaswinterendsandspringbegins—especiallyiftheyhappenedtooverstockoninventory. Despitethisbeingaviablestrategyincertainsituations,thereareafewconsiderationsyoushouldkeepinmind: Onceyouofferaproductatacertainpricetoyourcustomers,increasingthepriceoftheproductlateronintheseasoncanbeverydifficultInsomecases,whendemandunexpectedlyspikesforaproduct(likehandsanitizersduringapandemic)significantlyincreasingthepriceonthisproductmayhurtyourbusinessreputation(ormayevenbeillegal)Ontheotherhand,fewwillcomplainaboutadecreaseinpriceThereforeitmakessensetointroduceaproductatahigherprice,observethereactionfromconsumersandthengraduallydecreasethepricetoincreasedemand/sales. Discoverhowtopretailersareincreasingtheirmarginsbyupto60% Getthe7pricingtipsleadingretailersusetomaximizetheirprofits. DownloadFreeGuide WhenNottousetheHigh-LowPricingStrategy Ahigh-lowpricingstrategywouldnotbeeffectiveinseveralsituations: CommodityPricing Iftheitemisacommodity,thepricewilltypicallyfluctuatedependingontheretailer’scosttoacquiretheproduct,aswellasoveralldemandfortheproduct. Inthissituationthemarketsetstheprice,andintroducingtheproductatahighpricewillnotgenerateanysalessincecustomersintuitivelyknowhowmuchtheitemshouldcost.Forexampleyoucan’tsimplystartsellingcucumbersat$10apiece. EDLPStrategy(EveryDayLowPricing) Someretailerscompeteprimarilyonprice.Theytypicallyemployan“EverydayLowPriceStrategy”(EDLP).Thesediscountretailersarefocusedonkeepingpriceslowerthanthecompetition,sotheywilloftenofferpricematchingandconsistentlymaintainlowpricesthroughouttheentireseason. LuxuryBrandPricing Ontheothersideofthespectrumyouhavehigh-end,luxuryretailers. Strongbrandsinthissegmentwilltypicallystayawayfromhigh-lowpricing,becausetheirpricesarestrategicallyhightobeginwith.Reducingpricesmaydamagetheperceptionofluxuryamongconsumers. Somehigh-endretailersdestroyunsoldinventoryattheendoftheseasoninsteadofmarkingitdown—forthisveryreason. LossLeaderandMarketPenetrationPricingStrategies “LossLeader”and“MarketPenetration”strategiesarealsoatoddswithhigh-lowpricing. LossLeaderpricingiswhenaretailerintentionallydiscountsthepriceofaproduct(sometimesbelowcost)inordertogenerateextrademandandtrafficintotheirstore(hopingconsumerswillpurchaseadditionalproductsontheirvisit). MarketPenetrationiswhenretailersintentionallylowerthepriceofaproductinordertogainmarketshareovercompetitors. WhereDoesHigh-LowFitintheBigPicture? High-Lowpricingisarelativelysimplestrategythatreliesonabitofguesswork. Retailersmayprefertouseitwhenitistoodifficulttocalculate,set,andmanageoptimalpricesthroughouttheseasonforeachproductonanindividualbasis.Althoughitcan’tcomparetoamorecomprehensivepricingplan—it’susefulinthisparticularinstance. Toputthisinperspective,ifyouhave100storesand10,000products,youarelookingat1,000,000Store/SKUcombinations(eachwiththeirowndemandcurvesandoptimalprice).Effectivelymanagingpricesforsomanystore/SKUcombinationsissimplynotpossibleforahuman. Soit’snosurprisewhysomeretailersusesimplerrule-basedpricingstrategies(likehigh-low)tomanagetheirproductprices. Butdespiteitssimplicity,high-lowdoesn’tprovideafoolproofapproachtopricing,anditssuccessis(atleastinpart)determinedbyguessingcorrectly: Howhighshouldtheinitialpricebe?Howoftenshouldpricesdrop?Howbigshouldthepricedropsbe?Howmuchinventoryisneededforeachpricepoint?Whatshouldthepricingfloorbe? Eachofthesequestionsisdifficulttoanswerwithoutsomesortofadvancedanalyticsorapowerfuldemandforecast. Andifyoucouldanswerthesequestionsaccurately,atscale,foreveryProduct/Location,youwouldnolongerbethinkingofpricingstrategyinconceptslike“high-low.”YouwouldbemoreconcernedwithconceptslikeAI-drivenpriceoptimization. That’swhyhigh-lowpricingisagreatoptionforsmallerretailersthataretryingtofindanoptimalpriceonasmallnumberofproducts.Butathigherlevelsofretailercomplexity,itisdifficulttoimplementthisstrategybroadlywithoutmakingalotofguesses(andrelyingonluck). Instead,moresophisticatedretailersuseadvancedpricingtoolslikeretailAIandPredictiveAnalytics. Discoverhowtopretailersareincreasingtheirmarginsbyupto60% Getthe7pricingtipsleadingretailersusetomaximizetheirprofits. DownloadFreeGuide ImplementingAdvancedPricingStrategies AsmillionsofStore/SKUcombinationsmovethroughtheirownlife-cycles,pricesmayneedtobeadjustedinseveralstagesforeach(initialpricing,regularpricing,promotionalpricing,andmarkdownpricing.) Purpose-builtartificialintelligencelikeRetalon(designedandmadeforretailers)candothiscompletelyautomatically. Retalon’sretailAIengineisabletolookatdozensofcriticalfactorsthataffectdemand: PriceelasticityoftheproductSeasonalityEffectofsalespromotionsCompetitorpricingPricezonesCannibalizationofrelatedproductsAndmuchmore Thesystemwillthencalculatetheoptimalpricepointordiscountforeachproductateverylocationtomaximizegrossmarginandprofitabilitywithoutleavingyouoverstockedattheendoftheseasonoroutofstockonmerchandisethatisinhighdemand. Initialpricingofaproductdoesn’texistinavacuumandshouldincorporatepromotionalstrategies,aswellasmarkdownoptimization. HereisashortvideoabouthowRetalon’sPriceManagementsolutionoptimizespricesthroughouttheentireproductlifecycle: Ifyouwouldliketolearnmoreaboutpricemanagementstrategiesandhowretailpredictiveanalyticscanhelpyourspecificbusiness,getintouchtorequestademooranassessmentonyourowndata. Relatedposts:3TopTrendsinNon-StoreRetailing(2021)AIandRetailPromotions:HowtoHitYourPromotionalGoalsRealizingthePotentialBusiness-SpecificAnalyticsinFashionRetail(2021)RetailSeasonalDemandForecastingin2021 Bookademotoday! 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