Common Advantages vs. Disadvantages of the High Low Pricing Strategy
As products seemingly gain and lose popularity overnight, companies need price elasticity that can steadily bring in the most profit.
High low pricing achieves flexibility by combining elements from the price skimming and loss leader pricing strategies. By implementing the high low method, businesses can initially set a higher price and later lower it through discounts if needed. This method also gives management the ability to increase or decrease rates over time.
When businesses lower product prices, it attracts customers who don't want to miss a good deal. Companies that receive an influx of daily sales can subsequently raise the rates again to boost profit margins.
This post will discuss the pros and cons of the high low pricing strategy, its implementation, and how to make the most of this method.
Advantages and Disadvantages of High-Low Pricing
As with every pricing method, the high low strategy has its pros and cons. The ability to fluctuate prices gives companies using this strategy leverage but can also run the risk of unstable profits.
Reasons for and against using high low pricing include-
- Generates Profits - Companies can increase their earnings by raising rates or generating more sales from discounted prices.
- Sales Promotions - Consumers are often looking for bargains, so running discount promotions increases sales by creating a rush for buyers to get the deal while it's available.
- Higher Traffic - As promotions gain more exposure, customer traffic increases as well as sales for both discounted and regular priced items.
- Increased Turnover Rate - Providing everyday low pricing on slow-moving products helps free up capital stuck in inventory by increasing the stock's turnover rate.
- Marketing Fees - Running advertisements for discounted items require hefty marketing expenditures that could affect the company's bottom line.
- Customer Expectations - Regularly promoting lowered prices could create a trend in which consumers wait to purchase items until they are marked down.
- Risk Management - If customers are only loyal to a business because of their discounted items, 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 of Goods - When discounts are frequently offered, it may give customers the impression that the products or company's brand is of low quality.
How High Low Pricing Works
By taking elements from the price skimming and loss leader methods, high low pricing allows businesses to change price tags when necessary. By monitoring elements such as customer demand, inventory costs, and market prices, management can increase or decrease prices to boost sales and profit.
Like the loss leader strategy, high low pricing tries to increase consumer traffic to sell not only discounted items but also marked-up products. Then, using techniques from the price skimming model, the business can skim capital from the other high-profit items to supplement the smaller profit margin from discounted goods.
When changing a product's price, the business does not have to revert to the original retail rate if sales were not ideal. For example, if a product was initially retailed for $60 but was not receiving an ideal sales average, the store could run a sale marking them down to $45.
Promoting this sale as a markdown makes customers more inclined to purchase the item because they feel they are buying a valuable product marked down from a premium price. In fact, a study showed that 79% of shoppers take advantage of available discounted items.
However, if there is leftover stock even after the sale promotion, the business can increase the price to $55 rather than $60 and repeat the process. This strategy gives the company insight into how different products perform at different price points.
By using psychological pricing, customers are more likely to purchase an item that's been marked down when a reference point is established. A reference price is the cost of an item without the discount. In the example above, the reference price was $60. Clearly displaying this price difference to the buyers validates their perception that they are getting a good deal.
High Low Pricing in Fashion Retail
The fashion retail industry is notorious for using the high low pricing model. When a new fashion trend hits the market, designers and retailers will drop a new collection at a relatively high price.
In the beginning, items are available in every color, size, and style. The less popular items are left in stock once loyal customers of the brand purchase their articles of clothing at full price.
These low-demand articles can quickly become obsolete as fashion trends change with the seasons, so they are marked down. These clothes are often repeatedly discounted to get rid of the stock and make room for new incoming clothing.
Fashion retailers generally use high low pricing because it provides a way to increase sales by marking down unpopular items. Clearing out the unwanted stock before the style becomes outdated can free up more capital within the inventory.
Using Ordering Software to Optimize Profit Margins
In this strategy, the more businesses can offer a low price, the better. However, it's essential to make sure they are still able to maintain a healthy profit margin to avoid losses. An excellent way to do this is to track supplier costs and continually search for the most affordable vendors.
If suppliers suddenly raise prices or businesses want to find more affordable vendors to increase their profit margins, companies should keep a close eye on their inventory order prices as well as other vendor catalogs.
Implementing ordering software that can provide all of this information in one platform can simplify this process and ensure pricing strategies are always optimized. Businesses that are able to find the lowest wholesale costs can offer their customers more affordable prices, boosting sales and satisfaction.
Companies using the high low method to set prices should understand the mechanics of how it affects customer satisfaction and profit margins. Businesses can avoid losing profit by fluctuating product prices based on competition, demand, and market costs.
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