High Low Pricing - Overview, Rationale and Advantages

High low pricing is a pricing strategy in which a firm relies on sale promotions5 P's of MarketingThe 5 P's of Marketing – Product, Price, Promotion, Place, and ... HighLowPricingApricingstrategythatinvolvessalepromotionstoencourageconsumerpurchasesHome›Resources›Knowledge›Strategy›HighLowPricingWhatisHighLowPricing?Highlowpricingisapricingstrategyinwhichafirmreliesonsalepromotions5P'sofMarketingThe5P'sofMarketing–Product,Price,Promotion,Place,andPeople–arekeymarketingelementsusedtopositionabusinessstrategically.The5P'softoencourageconsumerpurchases.Inotherwords,itisapricingstrategywhereafirminitiallychargesahighpriceforaproductandthensubsequentlydecreasesthepricethroughpromotions,markdowns,orclearancesales.Withthisstrategy,aproduct’spricealternatesbetween“high”and“low”overagiventimeperiod.  BreakingDownHighLowPricingAhighlowpricingstrategycombinesaspectsofpriceskimmingPriceSkimmingPriceskimming,alsoknownasskimpricing,isapricingstrategyinwhichafirmchargesahighinitialpriceandthengraduallylowersthepricetoandlossleaderpricingLossLeaderPricingAlossleaderpricingstrategy,atermcommoninmarketing,referstoanaggressivepricingstrategyinwhichastorepricesitsgoodsbelowcostto.Itinvolvesdecreasingpricesonproductsthroughsalespromotionandre-increasingthepriceafterthepromotion.Thepromotionalsalesareanimportantaspectofthestrategy,astheycreateasenseofurgency–e.g.,“getitwhileit’sabargain!”.Additionally,similartoalossleaderpricingstrategy,highlowpricingaimstodrivestoretrafficandhopefullyencouragesconsumerstopurchaseadditionalitemsoncetheyareatthestore.Forexample,thepriceofaproductoveratimeperiodmaylookasfollowsunderthepricingstrategy.  Thereasoningbehindthispricingstrategyistogiveconsumerstheperceptionofabargainand,thereby,togeneratehighsalesduringapromotionalperiod.Byapplyingadiscounttoaproductthatispriced“high,”consumerswillbemorelikelytopurchasetheproductbecauseoftheirpresumptionthatitisabargain.Inessence,theinitialhighpriceestablishesthevalueoftheproducttoconsumers.Then,whenthepriceislaterreducedduringapromotionalperiod,thelowpriceisestablishedasabargainforconsumers.Thestrategy’sgoalis,fundamentally,thesameasthatofmostbusinessstrategies–increaserevenues,growthecustomerbase,andimproveacompany’sbottomline–profits.Thisisaccomplishedthroughmeanssuchasthefollowing:GenerateadditionalsalesGenerateexcitement,drivetraffictothestore,andstimulatethesaleofotherproductsSell(turn)inventoryInventoryInventoryisacurrentassetaccountfoundonthebalancesheet, consistingofallrawmaterials,work-in-progress,andfinishedgoodsthatathatwouldotherwisebeunsellableattheinitialprice HighLowPricingandReferencePriceWhenusingthispricingstrategy,areferencepricemustbeestablished.Thereferencepriceisthepricethatbuyerscomparetothediscountedsalepriceoftheproduct.Thereferencepriceisimportantinhighlowpricing,asitmakesconsumersperceivethattheproductisabargainwhenitisofferedatasubstantiallylowerprice.Forexample,consideraproductwithanormalsellingpriceof$15.A50%discountisapplied,resultingina“low”priceof$7.50.Inthiscontext,the$15priceisthereferenceprice. AdvantagesofHighLowPricingRevenuegeneration:Byofferingaproductatvariouspricelevels,afirmcangenerateadditionalsalesandreachmoreprice-sensitiveconsumers.Excitementcreation:Firmsthatusethestrategygenerateconsumerexcitementandcreatea“buyitwhileit’sonsale”atmosphere.Increasedstoretraffic:Promotionsincreasetraffictothefirm,whichcanhelpitgainexposureandgenerateadditionalsalesonotheritems.Turninginventory:Thestrategycanbeusedtosellslow-movinginventory. DisadvantagesMarketingexpenses:Asthestrategyreliesheavilyonsalepromotions,itrequiresstrongmarketingeffortsandincurssignificantadvertisingexpenses.Consumerexpectations:Thepricingstrategyrunstheriskofencouragingconsumerstoalwayswaitforasalebeforebuyingitemsatthestore.Riskoflosingprofit:Althoughthestrategygeneratesadditionaltrafficandsalesforthestore,itisimportanttointroduceotheritemsatthestoretogenerateadditionalsales.Astorerunstheriskoflosingmoneyifconsumersonlygopurchasethediscounteditem.Perceptionofquality:Consumersmaybelievethatitemsarediscountedbecausetheyareofsubparquality.Thisbeliefcancreatethesensethatthestore’sitemsareoflowerqualitythanthoseofitscompetitors. AdditionalResourcesCFIistheofficialprovideroftheFinancialModelingandValuationAnalyst(FMVA)™BecomeaCertifiedFinancialModeling&ValuationAnalyst(FMVA)®CFI'sFinancialModelingandValuationAnalyst(FMVA)®certificationwillhelpyougaintheconfidenceyouneedinyourfinancecareer.Enrolltoday!certificationprogram,designedtotransformanyoneintoaworld-classfinancialanalyst.Tokeeplearninganddevelopingyourknowledgeoffinancialanalysis,wehighlyrecommendtheadditionalCFIresourcesbelow:MarketPositioningMarketPositioningMarketPositioningreferstotheabilitytoinfluenceconsumerperceptionregardingabrandorproductrelativetocompetitors.TheobjectiveofmarketPriceDiscriminationPriceDiscriminationPricediscriminationreferstoapricingstrategythatchargesconsumersdifferentpricesforidenticalgoodsorservices.PriceTakerPriceTakerApricetaker,ineconomics,referstoamarketparticipantthatisnotabletodictatethepricesinamarket.Therefore,apricetakermustTotalAddressableMarketTotalAddressableMarket(TAM)TotalAddressableMarket(TAM),alsoreferredtoastotalavailablemarket,istheoverallrevenueopportunitythatisavailabletoaproductorserviceifCFI'sCorporate&BusinessStrategyCourseLearntoperformStrategicAnalysisinCFI’sonlineBusinessStrategyCourse!Thecomprehensivecoursecoversallthemostimportanttopicsincorporatestrategy!CorporateFinanceInstituteBacktoWebsite0searchresultsfor‘’Peoplealsosearchfor:excelFreefreecoursesBalancesheetaccountingIRRwaccExploreOurCertificationsFinancialModeling&ValuationAnalyst(FMVA)®LearnmoreCommercialBanking&CreditAnalyst(CBCA)™LearnmoreCapitalMarkets&SecuritiesAnalyst(CMSA)®LearnmoreCertifiedBusinessIntelligence&DataAnalyst(BIDA)™LearnmoreResourcesExcelShortcutsPCMacListofExcelShortcuts 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