What is High-Low Pricing?

High-low pricing is a retail strategy where a product is initially offered at a high price and later discounted through promotions or clearance sales. It aims to attract different customer segments: those willing to pay a premium for early access and others who prefer waiting for discounts.

The high-low pricing strategy is simple:

Set an initial high price.
After the initial sales period, reduce the price (either periodically or permanently).
As the product approaches the end of its lifecycle, significantly discount it to make room for new inventory.

This approach is similar to price skimming, where companies set an initial high price to attract early adopters, with plans to reduce the price after a certain period to enter the broader market (Apple does this with its products, for example).

The main difference with high-low pricing is that it is not limited to new products, and can be applied throughout the product’s lifecycle to maintain interest and attract different customer segments.

Synonyms

Hi-low pricing
Price skimming

High-Low Pricing Strategy Explained

When you intially set a high price for a product, then reduce it at a later point in time, there are several factors that come into play to drive sales at their respective stages in the product lifecycle.

In the first moments after release, those who are most excited about your product and/or the least price-sensitive will gladly buy it at the high price because they want the newest and best product. These initial sales are a significant driver of profit for your business because margins are higher.

When those early adopters are satisfied, there are a few ways you can use psychological pricing to your advantage:

Limited-time promotional periods that drive urgency
Price reductions that open your product to a broader audience
Offers that coincide with specific events or holidays (e.g., Black Friday, Cyber Monday)
Marketing tactics like price anchoring (showing the slashed initial price so buyers know how much your product used to cost)

As your product’s lifecycle progresses, you can use high-low pricing to maintain interest, attract new customers, and drive consumer excitement for your product.

It works because there’s a unique relationship between price and product quality. Consumers often associate higher prices with superior quality or exclusivity, which is why early adopters are excited to have paid a premium for what they believe is the best product. Meanwhile, price-sensitive customers who wait to purchase feel like they’re getting a great deal on a high-quality product.

Done right, it makes your product look both premium and accessible.

Advantages of High-Low Pricing

As one of the most commonly used tactics across retail and e-commerce, high-low pricing is one of the best dynamic pricing strategies.

It comes with several advantages:

Higher sales volume

By initially setting prices high and subsequently offering discounts, businesses can attract both early adopters and price-sensitive consumers, maximizing overall sales.

More consumer interest in other products

Customers who are already interested in discounted products might find additional products (full-priced or also on sale) they want to buy. You can also use the time they spend on their purchase to upsell and cross-sell other products and services.

Streamlined inventory management

Promotional prices facilitate faster inventory turnover. This is especially important for seasonal products and older models, which will eventually take up space you need to use for newer products.

Higher margins

Carrying costs account for as much as 55% of the inventory’s total value. The high-low price strategy provides a clear-cut way to move your old inventory out, which dramatically reduces the time and, therefore, cost of storage. In turn, your margins per product are higher.

Greater perceived value

Higher prices establish your product as premium or exclusive, which can increase its perceived value. And positioning it as such makes your decrease in prices seem that much more attractive to others, who want high-value products but aren’t always willing or able to pay for them.

Strategic marketing opportunities

High-low pricing provides a framework for marketing campaigns that create a sense of urgency and highlight value, enhancing customer engagement and brand visibility. And they make customers more happy with their purchase, which prevents buyer’s remorse and increases retention.

Flexibility in pricing

Dynamic pricing tactics make businesses more agile. This approach, in particular, allows you to adjust prices in response to market conditions, consumer behavior, and inventory levels, which helps you manage demand and optimize prices over time.

Disadvantages of High-Low Pricing

Like every other pricing method, the high-low approach has its drawbacks as well. You have to consider how your customers will react to psychological tactics before using them, both for ethical reasons and because they influence how others view your products.

Let’s examine the drawbacks:

Lower profit margins

It goes without saying that pricing your products a bit lower reduces your margins. When you think you’re setting an initially high number, it’s hard to see just how big of an impact it can make on your business. This can lead to margin leakage.

Your margins get even lower when you reduce prices during promotional periods. When you’re reducing prices by 30, 40, or even 50%, those numbers add up quickly and can significantly affect your bottom line.

Potential brand confusion

High-low pricing involves different price points for the same product at different times. If it isn’t clear you’re running a promotion and there is no messaging pertaining to the permanence of the lower price, consumers won’t have the urgency you need to drive sales.

Devaluing your product

If you lower prices too often, customers will eventually learn to wait for the sale. They’ll never see your product at its full value, which can hurt perceptions of your brand and prevent you from establishing it as a premium or high-quality product.

Frustration with ‘manipulative’ tactics

With any type of psychological pricing, a huge potential drawback is the fact that your customers might see it as manipulative. If they feel like you “tricked” them into buying something at a higher price, they may lose trust in your brand and be less likely to buy from you in the future.

This is especially the case if you’re selling a new, high-ticket offer that people aren’t sure how to value quite yet, like a consulting package. Since social proof plays a role in how people assess product value, they’ll be extremely upset if they find out others are paying as much as half.

Challenges with pricing consistency

Your sales team(s), channel partners, and retailers (brick-and-mortar and web-based) will be tasked with appropriately pricing your products per the current promotional strategy. This can be a lot of work, and there’s plenty of room for mistakes.

It’s possible to accomplish if you streamline communication and use software to keep everything organized. But, in the end, it’s still up to you to update those systems and keep track of how consistent your different sales channels are at representing your product.

Best Practices for Implementing High-Low Pricing Strategy

To use this retail pricing strategy effectively, you need to execute it in such a way that it doesn’t harm your brand or customer loyalty.

Here are our best practices for implementing a high-low pricing strategy:

Set clear pricing goals and objectives.

Every pricing strategy has a reason behind it. Your product positioning and ideal customer profile (ICP) will determine if a high-low pricing strategy is right for you.

Before going forward with this approach, ask yourself the following:

Do I want people to see my product as luxurious or high-quality?
Does a portion of my ICP have a low enough price sensitivity to buy at the high price?
Is my total addressable market large enough to justify lowering prices to appeal to them?
Are there clear-cut opportunities to run promotions, offer discounts, or reduce prices?

High-low pricing solves the problem of having a high-value product that needs to be available to the masses. But, if you have a niche market that’s willing to pay full price for high-end goods, there’s no reason to lower prices later. And if none of them are willing to pay full price, there’s no reason to set an initially high starting price.

Conduct market research to identify optimal price points.

So, how do you figure out whether to lower prices and, if so, by how much?

That’s where price optimization comes into the fold. Now…the price optimization equation for high-low pricing requires you to look at multiple variables.

Your initial price can’t be so high that your competition looks far better in terms of costs vs. benefits.
Your sale price can’t be so low that it destroys your margins or makes your product look cheap.
The promotional period should coincide with another major event, like a holiday or rollout of the next version of the product.

Start by looking at your competiton. Then, consider whether you want to price yourself higher to come off as the “better” alternative, or lower to advertise a bargain.

Then, study your customers’ willingness to pay, account for your margins at both the beginning and promotional price (margins should be exceptionally high in the beginning to make up for poor margins later on, and make your final pricing decisions based on what makes sense.

Always show the reference price next to the sale price.

When you do run promotional offers, make sure you take advantage of the anchoring effect. Not all of your customers will be well-informed on what the full price of your product was, so this should be clear for them.

For example:

~~$50~~ $24.99
~~$2,000~~ $500 OFF
3 for $20 (or $9.99 for one)

Consumers make decisions based on the first number they see, and the assess deals based on how much they’re saving. If you only tell them the sale price, you aren’t giving them enough information to make that comparison.

Use customer data to target promotions effectively.

Every sales and pricing tool worth its salt has some way to categorize, segment, and analyze customer data. You’ll need this information to run promotions.

Here’s where you can get deep with your segmentation:

By product usage. What features and services are your customers using most often? Least often?
By past transactions. What types of discounts have they received in the past, or what was their average transaction price?
By CLV. Target those who have bought from you more than once with special offers.
By engagement. Whether they’ve bought from you or not, engaging with things like your newsletter, social media content, and web content are all indications that they’re interested in your brand. If they’ve opted in to receive information, target them based on what they’re engaging with.

Increase sales volume to make up for margin losses.

Since your margins are going to take at least a small hit with high-low pricing, you’re going to have to make up for that with more sales. The strategy will take care of some of this on its own, but it’s not going to be completely automatic.

Communicate pricing changes in a way that emphasizes their benefits.
Use sales and marketing channels that coincide with your customers’ behavior.
Implement sales software that helps you manage these efforts across all channels.
Engage all of your customers throughout their lifecycle through personalized offers, content marketing, and advocacy initiatives.

All these things will help you sell more, with greater efficiency and higher retention rates.

Don’t rely on high-low pricing alone.

High-low pricing should be used sparingly, and in conjunction with other strategies like:

Product bundling and cross-selling to increase average order value (AOV)
Upselling to premium versions of your product
Targeting higher- or lower-paying customer segments with tiered pricing models
Using dynamic pricing to improve agility in your market

Use technology for efficient price management.

There are a few tools you have to implement to ensure pricing is consistent, its impact is measurable, and that you have the ability to change it at a moment’s notice.

CPQ (configure, price, quote) is the most important tool here. It houses all your product data and uses pricing rules and workflows to ensure your prices are always accurate for the customers and segments you’re selling to.

The rules engine automatically enforces pricing contingencies, bundle offers, and makes upselling easy by suggesting relevant products and services.

It also allows you to measure the effectiveness of different pricing strategies so you can make adjustments as needed.

Other important tools include:

Pricing software that tracks market trends, competition, and customer demand
A CRM that helps you target specific segments with personalized offers
Sales engagement software that allows you to manage multiple sales channels efficiently
An ERP system that integrates with your CPQ and other tools to provide a seamless pricing and inventory management process

Examples of High-Low Pricing

To help you fully grasp the concept of high-low pricing, let’s look at some real-life examples from successful companies:

Apple

Perhaps the best example of high-low pricing in practice. Everyone knows that the first people to get the new iPhone are at least a little bit well-off. But it feels like everyone has an iPhone — almost everyone you know will have blue messages and FaceTime.

That’s because Apple utilizes high-low pricing with its product launches. New models are introduced at premium prices (see: prestige pricing), which are then reduced over time or through promotional offers to make the smartphones accessible to a broader market.

Macy’s

The department store giant is known for its frequent sales and promotions. It maintains high regular prices and sells somewhat expensive (but reputable) brands.

The strategy works because middle-of-the-pack brands like Polo Ralph Lauren and Tommy Hilfiger align with that same principle of “high costs for wealthier people, and low costs for those who shop promos.” This is what keeps Macy’s (and, by extension, the brands they sell) a household name, regardless of income level or social class.

Airlines

Airlines use a much more dynamic approach. Pricing fluctuates, sometimes multiple times per day, to reflect the current demand. It’s also not an exact science.

Sometimes, prices dramatically increase as the departure date approaches.
They might also decrease to maximize profits from empty seats.
Certain routes will have promos around holidays and vacation times.
Others will rise to capitalize on peak season demand.

This version of the high-low pricing strategy allows airlines to cater to different types of travelers and maximize their profits from each seat on the plane.

Fashion retail

Clothing companies normally introduce new collections at full price and later offer discounts during sales events or as seasons change. This enables them to sell off excess inventory before carrying costs get too high and space becomes too limited, and it attracts bargain-conscious consumers.