Strategic pricing is at the forefront of many companies' marketing efforts. Offering large discounts on high-priced items can create customer interest and increase your profitability. Although your business can benefit from high-low pricing, it could also experience setbacks if you don't plan ahead. Learn what high-low pricing entails and if it's a useful marketing strategy for your business.
What Is High-Low Pricing?
High-low pricing is when a business initially charges a high price for an item with the plan to mark the item on sale later. Typically, you would price the item above market value so that you can still turn a profit when you offer a sale. The purpose of this pricing strategy is to create excitement for your sale items and draw customers into your store or website. It can be a good opportunity to increase your marketing efforts.
With this pricing strategy, you may decide to only leave your high-priced items on sale for a set period of time. This can create a sense of urgency by encouraging customers to make their purchase within a specific timeframe. Another thought is that when your customers feel that they are getting a good deal, they may feel comfortable also splurging on a few high-priced items.
For example, many retailers have end-of-season sales to clear out some of their inventory to make room for next season's pieces. You could offer 40% off select items for a week to encourage customers to buy this merchandise before the next season approaches. The hope is that customers will buy your low-priced items along with high-priced new items. Whatever high-priced items are leftover toward the end of the season can be a part of your next sale.
The Advantages of High-Low Pricing
High-low pricing is a common sales tactic across all kinds of brands. High prices can establish the value of your products and make customers feel like they are getting a great deal when you lower your prices. Here are a few of the key benefits of high-low pricing:
- Increase profits: High-low pricing can help you target a more budget-conscious segment of your market. These customers may wait until they see a good sale to purchase a product. Offering discounts can help you make more sales and turn a higher profit.
- Clear inventory: Offering low prices is one way you can clear old inventory to make room for new items. If you notice certain items are stuck on the shelf, you may want to significantly lower their prices.
- Create interest: Marketing your sales and promotions is a way to increase interest and excitement about your brand. Limited-time offers make many customers feel inclined to buy now.
- Boost store traffic: Sales encourage customers to visit your store or website. Along with buying sale items, they may also notice a full-priced item they want to purchase. Without the sale, they may have never entered your store.
The Disadvantages of High-Low Pricing
When using this pricing strategy, remember that there may be some drawbacks to it. Assess your risk before deciding to lower your prices. Here are some disadvantages to consider:
- Potential profit loss: If you're only selling low-priced items, you may not be making much of a profit. The key is to sell a mix of sale and full-priced items.
- Setting expectations: If you have too many sales, customers may realize that they can wait until an item goes on sale to buy it. This could lower your foot traffic or website views when you aren't having any large sales.
- Costs of marketing: This pricing strategy requires you to spread the word about your sales through marketing. These expenses can add up, so it's important to anticipate how much profit this sale will make versus how much your marketing campaign costs.
- Lowering your value: If you have lower prices than your competitors, customers may start seeing you as a bargain brand with lower-quality items.
Implementing a High-Low Pricing Strategy
The key to an effective high-low pricing strategy is creating a sense of urgency. When advertising your sales or promotions, you may want to add messaging that this offer is for a limited time only. This strategy can entice customers to buy now rather than later.
Another important factor is being strategic about which items you put on sale and which you keep at full price. Many brands discount their out-of-season merchandise to make room for new items. If you want to sell a combination of sale and full-price items, markdown items that you have had for a while and keep new merchandise at full price. Take note of when certain items may be in demand. For example, in spring, a retailer may discount all of their winter items and keep summer wear full price.
Keep in mind that you could also benefit from a limited-time sale on high-demand items. If your brand offers a sale on swimsuits before any of your competitors do, customers may rush to your store to get swimsuits before the summer season. Knowing when to start and end sales heavily depends on market data, so do your research before starting any kind of deal or promotion.
High-low pricing can be a great way to increase your brand's value while giving customers an incentive to come to your store or website. By understanding how much profit you need to make off each item and which items are in high-demand, you can create a better pricing strategy.