The Advantages and Disadvantages of High Low Pricing

How often have you got annoyed when finding an item while shopping that you’d bought the week before at a reduced price? Although it can be annoying, it is very common and something that happens in almost every sector from groceries to furniture. You will find that many companies often have wide-ranging fluctuations in their pricing, a tactic known as high low pricing. 

Just what is high low pricing and why do companies do it? What advantages and disadvantages does this tactic offer, both to businesses and to consumers? Is it something that can help a business improve its metrics and KPIs (key performance indicators), or is it just a gimmick that can equally please and frustrate its customers?

What is high low pricing? 

Put simply, a high low pricing strategy is when a business uses a drop in the price of a product or service to encourage sales of that product. They will originally set a high price for that product, sometimes falsely so, and then reduce it to an optimal price point that will attract consumers. They may label the promotion as a “limited offer”, a “clearance sale”, or something similar. 

The strategy may be cyclical depending on the reasons the business is using it. It may be a one-off or a repeated tactic over time. 

How does high low pricing work? 

If you adopt a high low pricing strategy, you are combining features of loss leader pricing and price skimming. Price skimming is a short-term strategy where a business initially puts a high price point on a product and then gradually reduces it over time to attract more buyers. 

With loss leader pricing, an organization adopts an aggressive strategy and will reduce the price of a product or service to the point where they are making a loss on that product. However, they hope that by doing so, they will attract customers away from their competitors and that those customers will then spend more on other items, thus covering any losses. 

Similarly, high low pricing looks to increase traffic to a website or brick-and-mortar store and increase total revenue. One of the cores of a high low pricing strategy is to give an often-false perception that the consumers are getting a bargain. If a customer sees a significant discount on a product they looked at previously, then they think that the value to them has been increased.

The main goals of a high low pricing strategy are the same as those of any other tactic: expand brand awareness, boost traffic/customer numbers, generate additional sales and revenue, and potentially provide an opportunity to move stock that was originally overpriced or is overstocked. 

High low pricing advantages 

There is no such thing as a perfect business strategy, Every strategy and tactic you consider or use will come with both pros and cons. Knowing how to use a tactic so that the pros outweigh the cons is essential when it comes to deciding whether to use that tactic and how to use it. Your strategy should also be implemented in partnership with other tactics such as price tracking. 

1. Attract new customers and retain existing ones

A well-executed high low pricing strategy can attract the attention of new customers and drive them to your website or store. How successful it is will depend on how well you market your special offers. For example, if a supermarket has applied discounts to several items, then they will highlight those offers in any advertising they do and hope that those offers attract new as well as existing customers. 

Offering regular promotions will not just attract new customers to your business, it can also help you retain existing customers. When you have a loyal customer base, you will see an increase in CLV (customer lifetime value), and existing customers will likely spend 30% more on new products. So, when considering a high low strategy, look at ways it can achieve both goals. 

2. Increase revenue and profits 

Money makes the world go around, and every business wants to see higher revenue levels and better profits. What you want to see is that people who buy reduced items will then go and buy other full-price items. These extra purchases not only boost your revenue figures but can offset any losses incurred by items that are classed as loss leaders. 

You can combine your high low strategy with other tactics, such as a demand generation plan, to increase awareness and interest in your brand. You could achieve extra purchases by using popups to direct customers to complementary or peripheral items. For example, you could be offering contact center software at a discount, but direct the buyer to peripheral products such as headsets.

3. Move low-demand or overstocked items

Although predictive analytics can be very accurate at times, mistakes can still be made. Customer behavior and consumer trends can fluctuate, and the demand for an item may not be as high as you hoped. These changes in demand can be covered by any financial risk management plans you have to offset any potential major losses. 

It’s not just the actual costs of the items, but also additional costs such as warehousing, etc. A high low pricing strategy gives you the opportunity to offload items that are in low demand or that you have overstocked. Even if you discount items to the point that they are loss leaders, you want to recoup any losses through the purchases of other items.

4. Marketing identity 

If a business consistently uses a high low pricing strategy, it can become part of its marketing identity. If customers get to know that a business has a regular round of weekly or monthly discounts, then they will actively look for marketing materials promoting those discounts. 

That marketing identity can also depend on how you discount items. Do you simply promote a percentage discount or do you offer some type of coupon to apply a discount? If the latter, how time-limited do you make offers? Your high low marketing strategy could be a standalone or could be an integral part of your overall approach. 

High low pricing disadvantages

One thing to consider before moving to a high low pricing strategy is who your customer base is. High low pricing in a B2B sales strategy may look different from that in a B2C strategy. While the pros and cons will be similar, they may work a little differently for different businesses. Knowing what disadvantages may arise is as important as knowing what advantages the strategy will offer. 

1. Competitor comparisons

Consumers are savvier than ever before. With independent price comparison sites, online reviews, and the many marketing posts on social media platforms, it can take a lot to pull the wool over their eyes. If you have your high price point set too high, then they may look at what your competitors are offering that item before you have a chance to apply the lower price. 

For example, say a customer is looking for a VoIP IP phone system. You have the price set at $X with plans to reduce it to $Y. However, the potential customers see the $X price, look elsewhere, and find the system significantly cheaper than one of your competitors. Before adopting a high low strategy, look at what other businesses are charging so you do not have a significantly higher price point. 

2. Changes in customer behavior

Putting aside overstocked and low-demand items, how do you decide which products or services to include in your high low pricing strategy? You might be using predictive analytics to see which of your products will benefit from such a strategy but that will not provide you with 100% accuracy, 

You may also decide to conduct market research but that too would be subject to changes in trends and/or customer behavior. This means that you run the risk of a product not being in demand at all, even with a significant discount. You also need to think about seasonal demand and whether that will have any effect. For example, how many people would buy a discounted Christmas tree in June? 

3. Marketing and advertising costs 

Your marketing team will likely have a set budget for the year ahead. When you set that budget, do you make provision for specific marketing of any high low priced items? A lot will depend on the frequency with which you apply high low pricing. Regular offers will mean additional marketing costs as you seek to spread awareness of the discounted products. 

4. Customer perceptions 

Have you ever looked at a significantly reduced product and thought, ‘Why are they selling it so cheaply?’ If you are constantly discounting items, then some customers may think this too and that perception may be applied to all your products and can think your products are of lower quality than your competitors. With a lot of competition, especially in the eCommerce sector, you don’t want people going to competitors. Of course, if you’re a third-party seller, then the products offered may be exactly the same and can dispel that perception. 

5. Lower profitability 

What could be an advantage could also be a disadvantage. While you are hoping that a customer will buy other items to increase profitability, there is also a chance that they buy only the discounted item, especially with an online store. It’s also important to consider any additional costs such as warehousing costs for overstocked items or additional advertising costs for your discounted items. 

Implementing a high low pricing strategy 

As you can see, a high low strategy can come with both potential pros and cons. How well your strategy will work can depend on various factors from customer behavior to competitor pricing. You also want to think carefully about why you are adopting this strategy. Is it to attract new customers, to offload low-demand items, or to boost revenue?

One possible other reason to implement a high low strategy is for your discounted products to act as lead magnets. While you might normally offer something like an ebook as a lead magnet, a significantly reduced item or service could also work if you want to increase the number of people subscribing to your email marketing list. Of course, this could run the risk of people signing up to get the product and then unsubscribing shortly after.

To successfully implement a high low pricing strategy, you need to set out the goals you hope to achieve from it. Then you need to work through every potential pro and con that will come with using the strategy. For any possible advantages, look at how you can best achieve them. And for any potential disadvantages, look at how you can avoid or mitigate them. 

Evaluate your high low pricing strategy 

As with any other sort of strategy, it’s crucial that you evaluate how well it has performed and make any changes where and when needed. With savvier consumers, you need to be very careful not to have too much disparity when it comes to higher-priced items. 

If you’re using high low pricing for the first time, monitor and track the various KPIs and metrics to see how well it’s working. Some of the main ones to track include:

• Website visitors. 
• Sales and conversions. 
• Sign-ups (to mailing lists, etc.).
• Gross and net profit margins.
• Customer acquisition costs (CAC).
• Customer lifetime value (CLV).

You should also remember that you are probably not the only business to be using a high low strategy. If your closest competitors are also using one, you should consider monitoring any competitors and related campaigns they run, both in terms of how they do it and how successful they are. 

The takeaway 

How you implement a high low pricing strategy will very much depend on the sector you operate in. A supermarket may choose to use it on a weekly basis, while a SaaS (software as a service) business may use it less regularly. While it can be very effective, businesses should consider their goals carefully before moving to the planning stage.

The major factor that will decide whether to progress or not is if the pros outweigh the cons. However, even when you identify disadvantages – or potential disadvantages – you should look at how much of an effect they might have and whether they can be mitigated for.