What Is High–Low Pricing? (Definition and Examples)

By Indeed Editorial Team

Published June 17, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Businesses use different practices to achieve their organizational and financial goals. One of the challenges that business owners may face is determining how to set the price of their product or service. Understanding the concept of pricing strategies, especially the high–low pricing strategy, can help you adjust the prices of products or services to increase an organizations profitability. In this article, we define the high–low pricing strategy, learn when to use it, explore its advantages and disadvantages, and provide some examples.

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What is high–low pricing?

The high–low pricing method is one of the eight basic pricing strategies for retail businesses. Accounting professionals also refer to it as the skimming pricing strategy or hi–lo strategy.It involves introducing a product or service to customers at a high price before gradually reducing the price through discounts, promotions, markdowns, or clearance sales. This can be an effective strategy if a business sells a new product.

For example, if a business uses the high–low strategy for the sale of a new flagship smartphone, the company can make the initial price point high. If the company wants to sell more units of the phone at a time when the demand for the phone is lower, they can reduce the price and run a promotional campaign. Businesses can then increase the price point at the end of the campaign.

Related: 8 Types of Strategic Pricing for Products and Services

When to use the high–low strategy

You can use the high–low strategy when a business possesses an extensive inventory collection. A large inventory collection is vital because it allows you to choose from a variety of products. It also allows you to rotate discounted items frequently. Businesses that sell seasonal products may apply the high–low strategy to holiday-specific items. Such a business can lower the prices of such items when their season ends for increased profitability.

Businesses with perishable products that expire quickly may also use this pricing strategy. These include natural health products and food items. Such a business can build its promotional and discount sales based on the product expiry dates. A business that tracks customer preferences can offer discounts for preferred items, meeting their customers' needs.

Advantages of the high–low strategy

Businesses that apply the high–low strategy to their product prices can positively impact their financial and organizational structure. Here are a few benefits of using the high–low strategy:

Size of customer base

Businesses that use the high–low strategy discover the potential of promotional campaigns to attract customers. A business that uses promotions and coupons advertises its efforts publicly, attracting customers to make inquiries or buy products even if they haven't done so previously. The high–low strategy not only helps with the acquisition of new customers. It also increases a business's chances of keeping existing customers, who may return to repeat their usual purchases and explore discounted items.

Increased profitability

Any business implementing the high–low strategy can potentially increase profitability. This is because customers that buy products with a discount coupon may use the opportunity to purchase other full-price items while shopping. For example, if a clothing retail business with a stocked sales floor runs a promotional campaign for discounts on items such as vests, customers may make additional purchases, such as shirts, while visiting the store.

Related: What Is a Competitive Price? Understanding Pricing Strategy

Market presence and excitement

Applying a high–low strategy requires you to advertise the items that you plan to sell at a discounted price. Although the advertisement's primary purpose is to attract sales of discounted items, it can also increase brand awareness. In this way, the pricing strategy can also serve as a marketing strategy. Businesses that use a high–low pricing strategy can generate consumer excitement and create a buying environment in their physical and online stores.

Sales of slow-moving inventory

Attaching discounts to items that customers aren't purchasing can increase the chances of the products selling. Businesses that keep old or excess inventory for an extended period may face unnecessary costs. These costs range from the opportunity cost of not being able to acquire fresh inventory to the cost required to rent out shelf or warehouse space. You can identify slow-moving inventory by looking for products that haven't shipped in a certain amount of time, such as 90 or 180 days.

Disadvantages of the high–low strategy

The high–low pricing strategy may affect a company's short-term and long-term operations. Here are a few disadvantages of applying the high–low strategy:

Cost of advertising

Any business that wants to attract customers runs advertisements, which can be expensive. Using the high–low strategy may involve intensive marketing efforts. Raising awareness of discounted products or services can require expensive continuous advertising campaigns. This is because the discounted products change regularly. A business could potentially channel the cost of running these campaigns into other profitable operations.

Market comparisons

It's easy for customers to compare the price offerings of two businesses with identical or similar products. This can be a disadvantage for a business using the high–low strategy, especially when it sets the prices of its expensive items above market value. If their prices are too high, there's a possibility that customers compare pricing with other stores and choose to purchase products from the store with lower prices. One of the ways a business can avoid losing customers is to try to prevent large price discrepancies with other stores.

Customer expectations

If a business regularly promotes discounted products and services, customers may see it as a standard practice. Customers may regard the high–low strategy as a trend and wait to buy items only when the business marks them down. Any business with a customer base that waits until promotional periods to buy products may not make steady profits.

Customer perceptions

If a business constantly uses the high–low strategy to offer frequent discounts on certain products, it can alter customers' perceptions. A customer may perceive the discounted items as low-quality products. A customer who perceives a particular set of products as low quality may see the business brand as low quality.

Risk management

If customer loyalty to a business is because of discounted items, sales may stay consistent. Consistency of sales can cause profit margins to drop. Any business that gains traffic from discounted goods may require reliance on regular-priced products to sustain its profit margin.

Customer behaviour

One of the challenges of using a high–low strategy is that it depends on the behaviour of customers who enter a store to purchase goods or services. Companies typically use extensive market research to observe what their customer base purchases, but it may be challenging to predict which items customers want to buy with 100% accuracy. This might result in fewer customers than anticipated opting to buy the more expensively priced products even if a business positions them close to discounted ones.

Examples of the high–low pricing strategy

Here are a few scenarios of businesses using the high–low strategy:

Example 1

Game publishers introduce a video game at a peak price. Although many customers may purchase the game at the time of release, the popularity and demand of the game is likely to decrease over time. After weeks or months following the game's release, the game publishers may begin discounting the product according to how the game's popularity reduces.

Example 2

A smartphone manufacturer and distributor can use the high–low strategy to modify the prices of their devices according to the latest trends in the technology industry. Suppose the manufacturer releases a smartphone and instructs its distribution branch to assign it a high price because of its novelty. The distributors may reduce the prices of older models of the same device and attract customers with a promotional campaign.

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