High-low pricing, often referred to as hi-lo pricing, is a dynamic and widely adopted pricing strategy in the retail industry. This approach involves setting a high price for a product and lowering it through promotions, markdowns, or clearance sales when the product becomes less desirable. This method is particularly popular among small and medium-sized retail firms but is employed by several large retailers.
How Does High-Low Pricing Work?
The essence of high-low pricing lies in its cyclical nature. Retailers start by offering products at higher price points, known as reference prices. Over time, these prices are reduced during sales events, creating a sense of urgency and excitement among consumers. This strategy leverages the psychological appeal of getting a good deal, which can drive significant traffic to stores and websites.
For instance, companies like Macy's and Kohl's are notable examples of retailers that use high-low pricing strategies. They frequently offer substantial discounts during sales events, making their products more attractive to price-sensitive customers. Similarly, brands like Nike, Reebok, and Adidas employ this strategy to clear out old stock and make room for new arrivals.
Advantages of High-Low Pricing
- Increased Store Traffic: Promotions and sales events attract more customers, increasing foot traffic and online visits. This can lead to additional sales on other items not currently on promotion.
- Revenue Boost: A well-promoted price decline can significantly increase total sales volume, boosting overall revenue.
- Inventory Management: High-low pricing helps clear out slow-moving inventory, convert excess stock into cash, and free up space for new products.
- Marketing Buzz: Sales and promotions create customer excitement and anticipation, enhancing brand visibility and engagement.
Disadvantages of High-Low Pricing
- Customer Wait-and-See Behavior: Frequent sales can train customers to wait for discounts, which can negatively impact regular-priced sales and lead to unpredictable sales patterns.
- Perceived Quality Issues: Significant discounts may lead customers to question the quality of the products, potentially harming the brand's reputation.
- High Marketing Costs: Promoting sales events can be expensive. If not managed properly, marketing costs can outweigh the benefits of increased sales.
High-Low Pricing vs. Everyday Low Pricing (EDLP)
While high-low pricing involves fluctuating prices with periodic discounts, Everyday Low Pricing (EDLP) offers consistently low prices without frequent sales events. Retailers like Walmart and H&M use EDLP to provide stable pricing, which helps predict demand and maintain steady sales. However, EDLP does not benefit from the marketing buzz and increased traffic generated by high-low pricing campaigns.
Examples of High-Low Pricing in Action
High-low pricing is prevalent in the fashion and shoe industries. Retail giants such as Nordstrom and Macy's regularly implement this strategy. They set relatively high prices but offer substantial discounts during end-of-season sales, helping them sell off-season goods and attract new customers.
In conclusion, high-low pricing is a versatile strategy that can drive sales, manage inventory, and create marketing excitement. However, careful planning and execution are required to balance the benefits against potential drawbacks.
