High-low pricing

High-low pricing is the practice of setting the price of most products higher than the market rate, while offering a small number of products at below-market prices. By doing so, a retail or web store location hopes to attract customers with its low-price offerings, at which point they will also buy some of the high-price items. The seller hopes that the net effect of this strategy is to increase overall profitability, despite incurring losses on the few low-priced items.

The low-price items are not usually set permanently at a lower price. Instead, coupons and other promotions are used to reduce prices to low levels for short periods of time. By doing so, management can shift low pricing among different products, which may attract different customers or attract the same customers to shop at the store multiple times. Thus, the use of low prices is an ongoing marketing technique that should be in continual use.

Example of High-Low Pricing

Grocery stores routinely issue a continuing stream of advertisements that feature low prices for specific items. The advertised items are usually located far back in the stores, so that shoppers must pass an array of other products before finding the low-priced items that are on sale. Since most grocery shoppers need to buy a large number of items every time they enter the store, the business is nearly guaranteed to sell a number of high-priced items along with the low-priced item(s).

Advantages of High-Low Pricing

The following are advantages of using the high-low pricing method:

  • Profit increase. When properly implemented, the high-low technique can yield substantial profits; but only if customers buy multiple additional items that are fully priced.
  • Marketing. The high-low method essentially becomes the marketing method for the business, since it must constantly advertise a selection of low-price items.

Disadvantages of High-Low Pricing

The following are disadvantages of using the high-low pricing method:

  • Risk of loss. If a business does not place its low-price items properly, or is dealing with price-sensitive shoppers, it may find that it loses money on its low-price promotions.
  • Customer loyalty. If customers become aware that the bulk of the products offered by a business are higher than the market rate, they will be more likely to shift their spending loyalties elsewhere.
  • Marketing cost. It can be expensive to run a perpetual series of marketing campaigns to tout the latest low prices.

Evaluation of High-Low Pricing

The high-low pricing method is widely used, but discerning shoppers in the Internet era are more capable of spotting lower-priced items elsewhere, and so will only buy the low-price items and will avoid the high-price items. Also, a business that persistently offers high prices on the bulk of its products will not garner much customer loyalty. Competitors that use everyday low pricing for all of their products can compete effectively against this strategy.

Related Courses

Revenue Management 
Revenue Recognition