Key Takeaways
- High-low pricing strategy can boost sales by using higher initial prices followed by strategic markdowns.
- A sustainable low-price position depends on cost advantages, efficiency, scale, and consistent quality.
- Avoid price wars and excessive discounting that can train customers to buy on price alone.
- Successful low pricing requires strong pricing alignment across people, processes, and operations to protect profitability.
Utilising a high-low pricing strategy is not simple, and there are several points to consider. Do you have a deeply rooted low-price position? Or are you only attempting to match your competitors? Does your company meet the conditions to be profitable despite low prices?
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Businesses frequently face challenges in driving store traffic and encouraging customers to purchase additional items when they’re in the store. One of the reasons for this is that customers nowadays may visit shops only to assess products and compare prices. This enables them to purchase from another online or in-person retailer that offers the best price.
This is where the high-low pricing strategy comes in. A high-low pricing strategy is a widely known retail pricing scheme in which a product or service is launched at a premium price and then repriced and marked down over time. Employing this approach, the price of a product may fluctuate between high and low over a set timeframe.
How Can a High-Low Pricing Strategy Increase Profits?
A high-low pricing strategy can increase profits by using higher initial prices and subsequent markdowns to influence demand and encourage purchases. This approach can work in several ways:
- Create a higher reference price. Starting with a higher price and then repricing at lower prices can make products and services more attractive and create a sense of urgency to purchase.
- Increase sales and reach price-sensitive customers. Lower prices can attract customers who compare prices and are looking for better-value offers.
- Increase exposure for other products or services. The strategy can help bring customers into the store and increase sales of other products or services.
- Protect profitability through efficiency. Low prices and high profits are possible when a business has a strong, long-term cost advantage, high volumes, economies of scale and high process efficiency.
- Avoid relying on price cuts alone. Excessive markdowns can encourage customers to buy based solely on price, while major marketing and advertising efforts can make the strategy challenging.
Honda’s experience also shows why simply cutting the price of an existing product may not be enough. Its lower-priced Wave model combined practical performance with significant production cost reductions.
Before applying this approach, however, businesses need to assess whether they have the right pricing position for it and the conditions to remain profitable.
In this article, we answer these questions.
First, we explain what it means to be in a low-pricing position. We will also discuss the relationship between prices and profits. Then we examine the key factors that enable businesses to remain profitable despite low prices. Lastly, we examine Honda’s case and how it successfully shifted from a higher to a lower pricing position.
We argue that establishing a higher reference price and then repricing to lower rates can make your products and services attractive to consumers and create a sense of urgency to purchase. We believe that with the right methods and pricing position, a high-low pricing strategy can help you increase your sales and bring more profits to your business.
By the end, you will know whether a high-low pricing strategy is right for your business.
High-Low Pricing Strategy: When It Works and When It Doesn’t
How can starting from high prices and then shifting to lower prices generate higher profits? Winning with low prices is about more than simply staying one step ahead of competitors. Starting with high prices may lead consumers to perceive your products as high quality. But being costly can also decrease demand. So before cutting your prices, you must first assess if you are in the right pricing position.
You need to be aware of two important things if you’re planning to apply a high-low pricing strategy to your business: your pricing position and the link between prices and profits.
The Subtle Difference Between Genuine Low-Price Position and Price War Engagement
There is a distinction between an inherently low-price position and the decision to engage in a price war. A good low-price position is sustainable over the long term, based on reliability and consistency rather than instant gains.
To further explain, let us recall a famous price war in the United States aviation business. American, Delta, and United shifted their fare systems and repeatedly cut prices to compete with one another.
Another firm, Southwest, had always been in a feasible low-price position that others could not match, no matter how extreme their price reductions became. Southwest said that it would like to match the new fares, but that would require it to raise its prices.
Price reductions and price wars can be tempting, but they are founded on false beliefs that have little to do with a real low-price position.
One solution relates to organisational culture. Many businesses fail to recognise that the key to winning a price war is not having to engage in one in the first place. Take note that it is possible to be competitive without participating in a price war.
If it is not necessary, do not start a price war. Don’t go up against them. Don’t participate in excessive markdowns. These tactics only teach consumers in both B2C and B2B markets to purchase based solely on price.
High-Low Pricing Strategy: The Link Between Low Prices and High Profits
Can you expect strong revenue growth if you set low prices?
Low prices and high profits seldom go hand in hand. This is only possible when a company has a strong and sustainable long-term cost advantage over its rivals.
The price position influences the entire business framework, product quality, brand image, and how the business drives innovation. Thus, it governs which market segments the company will cater to and how it will do so.
Introduction to Price Optimisation 💰 Podcast Ep. 74!
7 Factors That Make Low Prices Generate High Profits
Are you thinking about how low prices can result in high profits? Read through the following factors to find out.
Administration and Production Factors
1. A Low-Price Position From the Beginning
Successful low-price businesses typically rely on a combination of low costs, efficient operations, and sufficient sales volume.
In many cases, they pioneered completely new business models. Although it is possible, it is pretty uncommon to successfully transition from a high-priced or mid-priced situation to a low-priced position.
2. High-Growth, High-Revenue Outlook
This creates economies of scale, which successful low-price businesses can maximise.
3. High Operational Efficiency
Some businesses function at a low cost and with high process efficiency, enabling them to profitably charge low prices while maintaining high margins and profits.
How do they do this? They specialise in procurement and are tough but fair when negotiating the terms and prices with their suppliers. Examples include Aldi, a German retailer, and IKEA, a Swedish retailer.
4. Adequate and Consistent Quality
Keep in mind that lower prices can never compensate for poor production, at least not over time. Appropriate resources are required for long-term success. Quality matters, and it must be implemented with consistency.
Marketing and Service-Oriented Factors
5. Emphasis on Core Products
They avoid offering anything that is not essential to the customer, allowing them to save money without risking value creation.
6. Price-Centred Marketing
They are primarily concerned with price when they advertise. Examples include Aldi and Lidl, as well as low-cost airlines such as Ryanair and Southwest, which have built their brands around transparent and competitive pricing.
7. No Mixed Messages
Almost all profitable ‘low price, high profit’ businesses adopt an EDLP, or ‘everyday low pricing’, approach rather than depending on regular promotional advertising.
How Do You Properly Execute a High-Low Pricing Strategy?
Are you currently in a high-price position but convinced that lowering prices is the best course of action? How are you going to do it?
With the right approach and proper implementation, you can cut your prices and still win the competition.
In The Fortune at the Bottom of the Pyramid, C. K. Prahalad explored how economic development can expand access to mass-market products among lower-income consumers.
If a company or one of its product lines seeks to pursue an ultra-low-price position, the very same seven components apply to a much greater extent. Let’s look at Honda as an example.
Low Pricing Strategy: Why Honda Switched To A Lower Pricing Position
Honda Dream, the group’s former best-selling model, was significantly more expensive than the low-cost motorcycles entering the Vietnamese market at the time.
Chinese competitors entered the market with substantially lower-priced motorcycles, putting significant pressure on Honda’s sales and market position.
As an immediate response, Honda reduced the Dream’s price, but recognised that this approach was not sustainable over the long term. This action was not intended to start a price war. Instead, it was the first step in a price position change for Honda.
Simultaneously, Honda was working on the Wave, a much simpler and much lower-priced model. The new bike combined reasonable performance with the lowest possible production costs.
Introducing a Lower-Priced Product: The Wave
Big firms like Honda can compete with ultra-low-cost suppliers in emerging economies, but not by lowering the prices of their existing models. A progressive readjustment and revamp, significant streamlining, local production, and immense cost awareness are needed for success.
The Dream’s days were numbered, but Honda’s were not. Honda introduced the Wave α as a significantly lower-priced model, using local sourcing and cost reductions to make the motorcycle more affordable. This strategy helped Honda regain market share in Vietnam.
Are Low-Priced Products Difficult To Market?
Marketing is undeniably a major challenge for companies with a low-price or ultra-low-price position.
Their efforts are distinct from the traditional advertising strategies of high-end luxury goods companies, which integrate eye-catching style, excellent performance, and high quality with extravagant packaging and idealistic promotions.
Knowledge is the key to marketing for low-cost businesses. This means understanding what customers require and want, what level of quality they expect, and, more importantly, what they can live without.
How Do You Profit From a High-Low Pricing Strategy?
Marketing can be a challenge when you shift to a lower pricing position. But that doesn’t mean the end of your competitiveness or profitability. Even without high-end products, you can still attract customers.
Ultra-low-cost products developed for emerging markets can also find opportunities in higher-income markets, creating new possibilities for businesses.
Major medical technology companies have developed simpler, lower-cost equipment for emerging markets, with some of these innovations subsequently finding applications in developed markets. The Dacia Logan is another example of a vehicle originally developed with price-sensitive markets in mind and subsequently marketed more broadly.
Such lower-cost equipment does not compete with the much more expensive tools used in hospitals or other medical practices. Under certain circumstances, ultra-low-cost items have created entirely new market segments for medical practitioners, allowing them to perform a few basic initial diagnostic tests on their own. V. G. Govindarajan refers to this as “reverse innovation.”
Advantages and Disadvantages of a High-Low Pricing Strategy
A firm can increase sales and reach more price-sensitive customers by employing a high-low pricing strategy. It can also increase exposure and sales of the company’s other products or services.
However, it demands major marketing efforts and advertising expenditures, which can be challenging. Buyers may presume that goods are reduced in price because they are of poor quality. This belief may give the impression that the store’s products are lower in quality than those of its competitors.
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Bottom Line
Companies can choose from a wide range of pricing options, ranging from highly luxurious to ultra-low. Whatever strategic price position a CEO chooses, they must still fulfil two critical duties: unifying each function of the organisation with that price position and then protecting it against risks from within and outside the business.
That is the only way for a company to leverage the compelling relationship between price and profit and generate long-term profits for shareholders.
You can benefit from implementing a high-low pricing strategy. The first step is to determine if you are in a suitable pricing position. If not, and you would like to shift from a higher to a lower pricing position, give the decision careful consideration. You must have effective management to implement strategies that support the success of your pricing innovations.
Our research indicates that the right pricing team and processes can create measurable improvements in earnings and margins over time, as businesses identify previously unrealised pricing opportunities, efficiencies and risks.
For a comprehensive view on maximising growth in your company, download a complimentary whitepaper on How To Improve Product Pricing.
Are you a business in need of help to align your pricing strategy, people, and operations to deliver an immediate impact on profit?
If so, please call (+61) 2 9000 1115.
You can also email us at team@taylorwells.com.au if you have any further questions.
