What Is High Low Promotional Pricing Strategy In A Small Business 📻
Small businesses often employ price promotions to attract customers, with some adopting a high low pricing strategy. This approach involves offering periodic discounts to create urgency, incentivise immediate purchases, and maintain profit margins. By leveraging the psychology of discounts and perceived value, many small businesses think they can compete effectively and encourage customer loyalty.
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The problem is that a high low pricing strategy sometimes proves ineffective due to several significant factors. Customers may lose trust and long-term relationships when they perceive regular prices as artificially inflated, impacting brand credibility. While this approach can attract price-sensitive consumers, it may alienate those seeking consistent and transparent pricing. Moreover, executing this strategy requires precision, and overuse can lead to inventory and profit management challenges. In today’s competitive retail landscape, price-savvy consumers leverage technology to identify genuine value, making it challenging to sustain a high low pricing model without constant discounts and reduced profitability.
In this article, we will assist small businesses in determining whether and how to incorporate high low pricing as a price promotion strategy. We will define this approach, its pros and cons, and subsequently offer practical guidelines for its implementation. We argue that with customers increasingly seeking sustained value for their money, businesses should not depend on conventional promotional tactics and superficial advertising slogans to boost sales volume.
At Value Culture, we believe that small businesses can freely experiment with diverse price promotion approaches, provided they do so while prioritising customer value. By the end, you will know if high low pricing promotions strategy is right for your small business.
Is High To Low Price A Good Promotional Strategy For A Small Business?
Price promotions are temporary reductions in the price of products or services, aimed at driving consumer interest and boosting sales. Businesses often employ these promotions to achieve various goals, such as clearing excess inventory, attracting new customers, or increasing sales during specific periods like holidays or back-to-school seasons. Price promotions can take the form of discounts, buy-one-get-one-free offers, or limited-time sales events, enticing consumers with the promise of cost savings and a sense of urgency.
One common pricing strategy closely related to price promotions is the “high low pricing” strategy. In high low pricing, businesses regularly alternate between higher and lower prices to create a perception of value and urgency. For instance, a small boutique clothing store might offer a week-long 30% off sale on select items, followed by a few weeks of regular pricing, and then another promotional event. This strategy keeps customers engaged and eager to make purchases during sale periods, ultimately benefiting both the business and its patrons.
Small businesses often leverage high low pricing to attract and retain customers. For example, a local bakery may offer a weekly “Friday Flash Sale,” providing discounts on a specific pastry or bread item to draw in foot traffic. By employing these tactics strategically, businesses can stimulate sales, maintain customer interest, and ultimately increase their profitability while keeping the competitive edge sharp.
However, price promotions in the form of a high low pricing strategy are not always guaranteed to yield success.
To illustrate this, let’s delve into a recent real-world example involving Woolworths, a major retail chain. An 18-month analysis of Woolworths Nescafe Gold coffee promotions finds that Woolworths has more than once briefly offered the product at a high price before discounting it and advertising it as a promotional item. The price analysis was conducted when the “Prices Dropped” Campaign started, roughly at the end of 2021 – around the same time as inflation started to pick up – to July this year.
During the campaign, the price for a 180g Nescafé Gold was c.$14 – a c.36% discount off RRP. Off-campaign, however, prices went to $20 and higher. The highest price was $22 – presumably, this is the actual RRP set for the list price.
Nescafé Gold is featured prominently in Woolworths’ “prices dropped” campaign, specifically designed for budget-conscious households. Many cash-strapped shoppers are unhappy with the large price fluctuations on Nescafe Gold because they believe they are not getting a cut-price deal on coffee over time.
Overall, Woolworths appears to be implementing fairly standard high low promotional pricing practices. The potential issues with their pricing, however, may be related to their RRP being too high and/or customer price sensitivity being much higher than anticipated.
The key learning small businesses can get from this case is that consumers are more price-conscious than ever before. Shoppers are prepared to track prices and promotions over long periods of time to work out what is and what is not a good deal. They are also cross-checking prices with any claims supermarkets make in their national pricing and advertising campaigns.
Pros and Cons of High Low Pricing for Small Businesses
High-low pricing is a strategy where businesses initially set prices high and offer discounts later. For small businesses, this approach can bring significant advantages. It can increase revenue by attracting customers with higher prices and then driving sales through discounts. The strategy also appeals to price-sensitive customers who might not have bought at full price, helping to grow the customer base.
Additionally, high-low pricing can be an effective way to clear slow-moving or seasonal inventory, making room for new products. Moreover, the frequent discounts create marketing opportunities, generating buzz and increasing brand visibility.
However, there are also potential downsides. One of the biggest challenges is customer expectations. When customers get used to frequent discounts, they might hold off on purchasing until a sale happens, which can delay purchases and reduce full-price sales. Over time, constant discounting can also damage the brand’s perceived value, as customers might start associating the business with lower prices rather than premium products.
Furthermore, offering discounts too often can put pressure on profit margins, especially if the discounts are too deep. Managing these pricing changes requires careful planning and can become operationally complex, particularly for small businesses with limited resources.
For example, imagine a small boutique that sells fashion items. They set their prices high for a new collection to attract early buyers, but as the season progresses, they offer discounts to clear out inventory. While this increases foot traffic and boosts sales volume, the boutique must ensure it doesn’t train customers to expect sales all the time, which could undermine the brand’s premium image.
Common High Low Pricing Mistakes Small Businesses Make
High-low pricing can be a powerful tool for small businesses, but it’s easy to make missteps that can undermine its effectiveness. One common mistake is setting initial high prices that are too high. If the starting price feels inflated or disconnected from the product’s actual value, customers may feel deceived, leading to distrust and reduced sales. For instance, a local café might price a sandwich at $15, only to discount it to $10 later. If customers perceive the original price as unjustified, they may question the café’s pricing strategy altogether.
Another pitfall is failing to communicate the value of the product or service before offering discounts. Without highlighting the benefits and quality, customers may not see the worth of the item, even at a discounted price. For example, a boutique selling handcrafted jewellery might offer a 30% discount without first educating customers on the craftsmanship and uniqueness of each piece. As a result, the discount may not attract the desired customer interest.
Additionally, not monitoring the frequency and timing of discounts can lead to customer confusion and erode brand value. If discounts are offered too frequently or without a clear pattern, customers may begin to expect them regularly, diminishing the perceived value of the products. A small electronics store that offers random discounts on gadgets without a consistent schedule may find that customers wait for the next sale rather than purchasing at full price.
Lastly, neglecting to assess the impact of high-low pricing on profit margins can be detrimental. Offering significant discounts without understanding the cost structure can lead to selling at a loss. For instance, a homeware store might discount a set of premium towels by 40%, not realising that the reduced price doesn’t cover the cost of production and overheads, resulting in financial strain.
Discussion On Sales Management When Using High Low Promotional Pricing Strategy
Perhaps you’re still uncertain about whether implementing a high low pricing strategy is essential for your small business. We can now delve into the advantages and disadvantages of this particular form of price promotion.
What are the advantages and disadvantages of a high low pricing strategy in a small business?
A high low pricing strategy in a small business offers several advantages. Firstly, it can attract price-sensitive customers, drawing them in during promotional events with the promise of significant savings. For instance, a local electronics store might periodically offer limited-time discounts on popular gadgets, enticing cost-conscious shoppers to make purchases. Secondly, it fosters a sense of urgency, motivating customers to buy during promotional periods.
However, this approach has its downsides. It can erode brand image if overused, as constant price fluctuations may lead customers to question product value. Moreover, executing high low pricing requires meticulous planning and resources to ensure pricing strategies remain competitive and profitable. It’s crucial for small businesses to carefully weigh these pros and cons when considering this pricing strategy.
What is the key to successfully implementing a high low price promotions strategy in a small business?
Small businesses can’t rely on regular promotional strategies and tokenistic advertising slogans to drive volume – customers are demanding real value for money over a sustained period of time. If a small business opts to venture into a high-low pricing strategy, consider the following guidance:
1. Customer-Centric Pricing Insights
Small businesses can start by closely engaging with their customers to gain insights. Conduct surveys, engage in conversations, or use social media to gather feedback directly from your customer base. For instance, a neighbourhood bakery can interact with its regular patrons to understand their preferences and which products they value most.
This hands-on approach helps businesses gain valuable insights without requiring extensive data analysis resources. By listening to your customers, you can tailor your high-low pricing strategy to provide the value they truly seek over an extended period.
2. Strategic Promotion Planning
Instead of relying on generic or frequent promotions, strategically plan your promotional events. Consider the timing and frequency of discounts carefully. For example, a small boutique clothing store may schedule a limited-time sale event during a relevant holiday or shopping season, offering discounts on items that have proven to be in demand based on past sales data. This targeted approach ensures that promotions are aligned with customer expectations, creating sustained interest and demand.
3. Continuous Monitoring and Adaptation
Regularly track the performance of your high-low pricing strategy. Utilise customer feedback and sales data to evaluate the effectiveness of your promotions. Be prepared to adapt and fine-tune your strategy in response to changing customer behaviours and preferences. A small hardware store, for example, may notice increased demand for certain tools during the gardening season and adjust pricing and promotions accordingly.
The key is to maintain flexibility and stay aligned with customer value drivers over time. This ensures that your high-low pricing strategy consistently delivers real value for your customers and drives business growth.
Implications Of High Low Pricing And Discounts In A Small Business
For a small business, it’s essential to optimise existing resources. If extensive data analysis is not possible, small businesses can use cost-effective customer feedback collection methods, like social media polls or comment cards. For instance, a local coffee shop can encourage baristas to engage with customers and collect input on menu preferences. Organisational changes can involve appointing an existing team member, such as a sales associate, to take on pricing insights alongside their current responsibilities. This approach ensures efficient use of available resources.
Small businesses should prioritise simplicity for strategic promotion planning. A lean marketing calendar can outline straightforward promotions tied to easy-to-recognise events like local holidays or special store anniversaries. This approach reduces the need for extensive planning and execution.
Additionally, encouraging cross-functional collaboration need not be resource-intensive; it can involve informal discussions between teams to ensure promotions align with overall business goals. By streamlining processes and maximizing the utility of existing resources, small businesses can effectively implement a high-low pricing strategy. This approach helps keep employee workloads in check and considers resource limitations.
Small- and medium-sized firm employees frequently have their hands full of workloads. But, our findings show that with the right set-up and pricing plans in place, incremental earnings gains can begin to occur in less than 12 weeks. After 6 months, your teams can capture at least 1.0-3.25% more margin using better price management processes. After 9-12 months, businesses often generate between 7-11% additional margin each year as they identify more complex and previously unrealised opportunities, efficiencies, and risks.
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Bottom Line
Implementing a high-low pricing strategy in a small business requires a balanced approach. Small businesses can overcome resource constraints by leveraging cost-effective data collection methods and streamlining internal processes. Prioritising customer-centric pricing insights through direct engagement and feedback is crucial. By focusing on understanding customer needs and preferences, businesses can tailor promotions effectively.
A lean marketing calendar that aligns promotions with simple and recognisable events can help keep planning and execution manageable. Encouraging cross-functional collaboration should not be resource-intensive but can be highly effective in delivering consistent, customer-driven value. The key is to remain agile and adapt as customer behaviors change. This ensures the strategy consistently aligns with customer expectations, driving growth and success.
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Are you a small or medium-sized business in need of help aligning your pricing strategy, people and operations to deliver an immediate impact on profit?
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You can also email us at team@valueculture.com if you have any further questions.
