High Low pricing is a popular pricing strategy in which a company charges a high price for a product in the beginning and reduces the prices later using discounting. Unlike the price skimming model, however, prices are not slashed permanently. Under the high low model, product prices alternate between high & lower during a particular time duration.
The goal of high low pricing is to lure customers to visit the stores with discounts, which might also lead them to buy other products as a result. The high low pricing is also different from everyday low pricing, which consistently uses low prices. Because the high low pricing strategy consists of both increasing and lowering prices, overall, products priced using a high low model have a higher price cumulatively in the long run.
High Low Pricing Examples
Adidas & Nike
The high low pricing model is frequently employed by retailers like Adidas & Nike. It is frequent to see price drops during the festive season, an occasion like the new year, or during a promotional campaign. Prices are jacked up once again after the promotional period ends.
JC Penny is a case study in High low Pricing. The company used the high low pricing for more than 100 years but abandoned it after Ron Johnson, who previously ran Apple stores, took over the leadership of the company. After he started his tenure, Ron dropped JC Penney’s high low pricing strategy by eliminating discounts and replacing them with everyday low prices. While this was not the only change he made, the change in pricing negatively affected consumer traffic and sales. Eventually, he was fired and the company reverted to its old model of high low pricing.
Advantages of High Low Pricing
Increased Revenue Generation
When a certain high price is associated with a product, consumers begin to use it as an anchor. When the price is dropped in reference to the high anchor price, consumers are more likely to buy, leading to an increase in revenue. The High low strategy also leads to an overall increase in revenue compared to the everyday low pricing model.
More Store Traffic
Consumers naturally flock to stores, both online and offline, when a price drop is announced on a previously highly-priced product. And when consumers do so, they more often than not end up buying a number of other products as well, increasing the total basket revenue.
Products that have not been selling at the expected pace and stacking up in the inventory can be cleared by lowering prices as part of the high low pricing strategy.
Disadvantages of High Low Pricing
Unwarranted Customer Expectation
One of the biggest drawbacks that come along with using the high low pricing model is that if customers figure out the pattern being followed to increase and decrease prices, they might not buy when prices are high and wait until prices are lowered. Once consumers have tasted the sweetness of low prices, increasing prices again can also lead to a drop in sales volume.
Damage Customer Perception
At times, low pricing might also turn off a particular segment of customers who associate price with quality. In another case, it might also lead the real target audience to think that the products are priced low because they are of subpar quality.
Increased Marketing Budget
In the second phase of the high low pricing where product prices are lowered, brands have to incur huge marketing expenses to get the word out about the price drop. In case the sale doesn’t attract enough customers to cover these marketing expenses, it might lead to a reduction in profit or even loss in some cases.
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