An important element of small business ownership is how to price your products or services. However, it’s not a simple guessing game. Pricing strategies are determined by factors like market conditions, consumer demand, and the cost of goods sold (COGS). Different pricing strategies are used for various reasons, such as maximizing profits, obtaining market share, or reducing your inventory.
The right pricing strategy for your unique business will depend on your industry, the product or service you sell, and the overall goals of your business. Here are some tips on how you can effectively use high-low pricing to improve your bottom line.
Types of pricing for a small business
Pricing in business is the process of placing a value on a service or product offered by the business. Pricing products and services is essential to your organization’s success and should be done using a solid pricing strategy. By pricing your goods or services effectively, you increase your products’ ability to sell and thus contribute to the growth of your company. Here are several pricing strategies used in business:
Penetration pricing - used by businesses to attract customers to a new product or service by offering a lower price during its initial offering.
Skimming pricing – a business charges the highest initial price that customers will pay and then lowers it over time.
Premium pricing – a seller sets artificially high prices for a product or service.
Psychological pricing - setting prices lower than a whole number. The idea behind psychological pricing is that customers will read the slightly lowered price and treat it lower than the price is. (Like charging $9.99 instead of $10.00.)
Bundle pricing – retailers offer several different products as a package deal, then offer that package to consumers at a lower price than it would cost to purchase those items separately.
Competitive pricing – businesses take competitor prices into account while setting their own prices.
Cost-plus pricing - also called markup pricing, is the practice of determining the cost of the product to the company and then adding a percentage on top of that price to determine the selling price to the customer.
That brings us to high-low pricing. Here’s more about this pricing strategy along with some pros and cons to consider.
Definition of high-low pricing
High-low pricing is similar to skimming (outlined above), except the price drops at a different rate. With the high-low pricing method, the price of a product significantly drops all at once rather than at a gradual pace. Retail businesses that sell seasonal products typically use a high-low strategy. Everyone knows the best deals on seasonal products, such as Christmas decor, will be the “after Christmas” sales.
High-low pricing isn’t just for the little guys. Big brand retailers like Macy's® and Nordstrom® and specialty companies such as Adidas® and Nike® set prices high but then periodically offer consumers lower prices through sales, promotions, or coupons.
Goals of high-low pricing
The goal of high-low pricing is the same as most business strategies – to increase revenues, grow the customer base, and improve a company’s profits. When considering a pricing strategy, keep some of the following goals in mind:
- Generate additional sales
- Generate excitement, drive traffic to the store, and stimulate the sale of other products
- Sell inventory that would otherwise be unsellable at the initial price
Pros of high-low pricing
High-low pricing has a lot of advantages in the post-pandemic marketplace. Many small businesses are rebuilding or seeking ways to improve profits. Some of the pros include:
- As Price goes down, so does the Unit Profit
- Sales increase (due to more consumers buying at the sale price)
- Total Weekly Profit increases for several weeks (because the Sales increase is bigger than the Unit Profit decrease)
- Reducing or completely getting rid of out-of-date products by discounting them and putting them on clearance.
Cons of high-low pricing
As with any pricing strategy, there are drawbacks to consider before you start changing price tags. Some reasons to choose high-low price include:
- Marketing fees - Running advertisements for discounted items may require a chunk of your marketing budget. Look into low-cost promotion on social media platforms to mitigate the impact on your cash flow.
- Risk management - If customers are only loyal to a business because of discounts, sales may stay consistent, but profit margins will suffer. Stores gaining traffic from marked down goods need to rely on regular-priced products to sustain their profit margin.
- Quality perception - When discounts are frequently offered, it may give customers the impression that the products or company's brand is of low quality.
- Customers may wait for impending sales rather than purchasing at full price.
What to consider when choosing a pricing strategy
Despite being simple to implement, high-low isn’t a foolproof way to move forward. Its success depends on how you answer these questions:
- How high should the initial price be?
- How often should prices drop?
- How big should the price drops be?
- How much inventory is needed for each price point?
- What should the pricing floor be? (A price floor is the lowest price that one can legally charge for some good or service.)
Measuring your pricing strategy outcome
Once you have a pricing strategy, it’s important to track the success. Tracking business revenues can show you where you currently are and if you need to make an adjustment. Our blog post has information you can use: Small Business Revenue: Determine Where You Stand You’ll learn the importance of revenue and strategies to increase revenue.
Another measurement that can be helpful is to look at your profit margins. Review What is a Good Profit Margin for Small Business? to learn how profit margins are calculated and impact your bottom line. Reliable accounting software can make it easy for you to crunch the numbers. Visit Capterra® (capterra.com) for software comparisons, pricing, and real customer reviews.
Keep in mind that the right price strategy can help you grow your business, and improve your customer engagement.
