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High Low Pricing

A pricing strategy that involves sale promotions to encourage consumer purchases

What is High Low Pricing?

High low pricing is a pricing strategy in which a firm relies on sale promotions to encourage consumer purchase. In other words, high low pricing is a pricing strategy where a firm charges a high price for a product and then subsequently decreases prices later on through promotions, markdowns, or clearance sales. In the strategy, a product’s price can alternate between “high” and “low” over a time period.

 

High Low Pricing

 

Breaking Down High Low Pricing

High low pricing combines aspects of price skimming and loss leader pricing. It involves decreasing prices on products through sales promotion and re-increasing the price after the promotion. It is an important aspect of high low pricing as it creates a sense of urgency – “get it while it lasts!”.

Additionally, similar to a loss leader pricing strategy, high low pricing aims to drive store traffic and hopefully encourage consumers to purchase additional items once they are at the store. For example, the price of a product over a time period may look as follows under the pricing strategy.

 

High Low Pricing - Chart

 

The reasoning behind the pricing strategy is to give consumers the perception of a bargain and to generate high sales during a promotion. By applying a discount on a product that is priced “high,” consumers will more likely purchase the product on the presumption that it is a bargain. In essence, the initial high price establishes the value of the product to consumers. When the price is reduced through a sale, the low price is established as a bargain to consumers.

 

High low pricing is used to:

  • Generate additional sales
  • Generate excitement, drive traffic to the store, and stimulate the sale of other products
  • Sell and turn inventory that would otherwise be unsellable at the initial price

 

High Low Pricing and Reference Price

When using high low pricing, a reference price must be established. The reference price is the price that buyers compare between the discounted sale price of the product. The reference price is important in high low pricing as it helps consumers perceive that the product is a bargain.

For example, consider a product with a sales price of $15. A 50% discount is applied, resulting in a “low” price of $7.50. In this context, the $15 price is the reference price.

 

Advantages of High Low Pricing

  • Profit generation: With high low pricing, a firm can generate additional sales and reach more price-sensitive consumers.
  • Excitement creation: Firms that use the strategy generates consumer excitement and creates a “buy it while it lasts” atmosphere.
  • Store traffic: Promotions increases traffic to the firm, which can help it gain exposure and generate additional sales on other items.
  • Turning inventory: The pricing strategy can be used to sell slow-moving inventory.

 

Disadvantages of High Low Pricing

  • Marketing expenses: High low pricing requires strong marketing efforts and expenses.
  • Consumer expectations: The pricing strategy runs the risk of encouraging consumers to wait for a sale to buy items at the store.
  • Risk of losing profit: Although the strategy generates additional traffic and sales for the store, it is important to introduce other items at the store to generate additional sales. A store runs the risk of losing money if consumers only go in to purchase the discounted item.
  • Perception of quality: Consumers may feel that items are discounted because they are of subpar quality. It can create the sense that the store’s items are of lower quality than its competitors.

 

Additional Resources

CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

  • Market Positioning
  • Price Discrimination
  • Price Taker
  • Total Addressable Market

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