When a customer makes a decision to purchase a product or service, they generally have three criteria:
- A specific product or service they want;
- A time they are willing to wait to purchase and receive it; and
- The price they are willing to pay.
That third point of price is where the retailer has the most control. The customer is looking for a fair price or a good value, and retailers can use different pricing strategies to present a value: BOGO (buy one, get one), percent-off sales, bonus pack offers, and more.
Some retailers employ a high-low pricing strategy to give the customer a desired price over time. High-low will not only give the customer the feeling of scoring a deal, but also give the retailer flexibility in pricing on a single item over time.
What Is High-Low Pricing?
High-low pricing is a pricing strategy in which a company introduces a product or service at a high price. The company will then lower the price through clearance sales, promotions, markdowns, special offers, or as demand decreases.
High-Low Pricing Examples
Items that are new to the market, even if it’s just an upgrade or variation of a common item, can benefit from the high-low pricing strategy. High-low pricing is most often used on:
Movies (Blu-rays, DVDs, or downloads), video games (consoles, discs, or downloads), and music all hit the market at a maximum price point. This is to capitalize on customers wanting to own the property first and experience it before the rest of the market.
Eventually, demand for all new things wanes. A new product comes along, technology improves, or other factors lead to customers not willing to pay the higher price point for the item. The high-low strategy allows these items to sell to new customers on sale racks, in the discount bin, or in a special offer.
Much like entertainment products, smartphones are hyped for months before they launch at a maximum price point. While many consumers like to upgrade to the newest phones immediately, patient shoppers already understand the advantages of the high-low strategy.
Prior to new smartphones hitting the shelves, retailers want to get rid of existing inventory. The high-low strategy allows retailers to reduce the price of older smartphones, sell them with bonus offers (store gift cards, streaming memberships, etc.), or discount trade-in specials.
The high-low pricing strategy is not strictly for big-ticket items like smartphones and other electronics. When holiday décor and grocery items begin arriving in stores, all are set at the high price point. As the holidays draw closer, retailers adapt lower price points to sell off excess inventory in order to avoid taking drastic price drops after the holidays. Just as with the larger-ticket items, lower demand brings lower pricing.
Advantages of High Low Pricing
Should retailers make a practice of using high-low pricing? There are advantages to this strategy:
- Inventory reduction: As stated previously, the high-low pricing strategy is a great way to move products quickly and get rid of excess inventory. Clearing the way for updated technologies or moving product with a waning demand can be achieved at the lower price point.
- New marketing incentive: When a product first launches at the high price point, the marketing is usually focused on the newness of the item. Once demand fades and the price point is dropped, it allows for a new marketing tactic like “won’t last long at this price” or “buy two for one great price.”
- More (and new) customers: An item that was once in huge demand will drive increased traffic at a low price point. In addition to more customers in a store or on a website, high-low pricing can bring a retailer new customers. A shopper may have bought their last three televisions at Target, but a newer television at a lower price point advertised at Best Buy can drive them into the store for the first time.
- Increased sales: High-low pricing allows retailers to reach more shoppers. By offering a product at varying pricing levels, the retailers capture eager shoppers first then more patient, cost-conscious shoppers over time.
Disadvantages of High-Low Pricing
While the high-low pricing strategy has its advantages, it does come with drawbacks:
- Loss of profit: Many customers will wait for prices to fall before making a purchase. It is a profit loss to the retailer when customers only come to the store to buy the newly marked-down item. To minimize loss, retailers must remember high-low is not just pricing, but a pricing strategy. The strategy part means the marked-down item should be used to draw the customer to the store in hopes they will also add other items to their basket with higher margins.
- Conditioning customers: When a retailer routinely uses high-low pricing, customers come to expect it. They will become conditioned into waiting for the price to drop before purchasing.
- Questioning quality: Why is a big ticket item now being offered at such a low price? Customers may perceive the item is flawed and that they will “get what they pay for.”
- Added marketing cost: Sales, promotions, special offers, and other tactics do not work unless retailers get the word out. The lower price points have to be communicated externally (media or online ads) and internally (store signs and pricing tags). New pricing brings new marketing, which brings new expenses.
High-Low Pricing vs. Everyday Low Price (EDLP)
As discussed in the previous examples, a high-low pricing strategy is focused on the customer. A retailer will set a maximum price on an item and then lower the price to create excitement, move inventory, and reap sales from cost-conscious customers.
An everyday low price (EDLP) strategy is more focused on competitors. Retailers using EDLP want to offer the lowest price on items to draw customers away from their competition. Even at a new item launch, these retailers work with suppliers to market the items at lower price points (i.e. buying in bulk, bonus pack buys, etc.).
Does Walmart Use High-Low Pricing?
Walmart markets itself as a low-price leader using the EDLP strategy. The company works closely with its suppliers to keep production costs and supply chain expenses down so Walmart shoppers can expect prices lower than its competitors. Though Walmart strives for EDLP, it does dip into the high-low pricing strategy when necessary.
The most common examples of Walmart using high-low pricing are on seasonal items or overstocks. Like all retailers, Walmart will lower prices on seasonal items as these times of the year draw to a close. Walmart also has clearance aisles in its stores with markdowns on overstock or discontinued items.
Aside from EDLP, Walmart also uses its Rollback pricing strategy. Walmart does not view a Rollback as a form of high-low pricing. It is defined as a temporary price reduction on a specific item. Walmart Rollbacks are a way of giving customers even more on top of their already low prices.
The high-low pricing strategy is a great way to build excitement at an item’s launch while still capturing sales over time. If the drawbacks can be maintained, high-low is an effective tactic to increase foot traffic and site clicks, and draw customers to view more of a retailer’s offerings by getting their attention off of one item.
Are you working with Walmart on pricing for your items? Need to keep supply chain costs down, avoid monthly fines, and put the profit back on your bottom line? Our team of Walmart advisors can help! Request a free consultation with our team this week to learn more about improving your performance with Walmart.