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Brands And The High-Low Pricing Strategy

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Brands And The High-Low Pricing Strategy

Branding Strategy Insider helps marketing oriented leaders and professionals like you build strong brands. BSI readers know, we regularly answer questions from marketers everywhere. Today we hear from Thomas, a CMO from Toronto, Canada who has these questions about pricing strategy.

“I am a long time reader and subscriber of Branding Strategy Insider. I’ve searched your site, but haven’t found any detail about what in the retail industry is called a high-low pricing strategy. I think my questions and your answers may be interesting to your many readers.

The group of companies I work for deals with luxury items such as wristwatches that traditionally have passed through a retail distribution model. The standard practice of luxury watch brands, those of the brick and mortar variety, was to make a watch for cost 1x. Because of sales, marketing and concomitant expenses, these watches are marked up to be sold to the distribution system at 3x (a 67% margin). The country agent (outside of Switzerland where it is manufactured), say Romania, buys the watch at 3x and sells it to distributors/retailers at 6x. These retailers sell it to the end customer for 12x. Thus a timepiece costing $100 to manufacture will end up at retail for $1,200.

Now suppose a company can avoid the entire distribution system and directly sell their product to the end customer on an ecommerce platform. The “retail” price is still the same, but the price that the watch can be sold for is the standard distribution selling price, i.e. 3x. So while a competitor’s watch will cost $1,200, this company can sell for $300. The amount of marketing will be less, since country agent/distributor/retailer marketing expenditure will no longer factor into the equation. Price alone will act as marketing “incentive” to purchase the product.

My company has experimented with this model to great success (and I should mention with zero marketing). However, several problems have arisen:

1) Some customers perceive that the quality is lower, because the price is lower, and continued “discount” over retail of 75% makes the EDLP the defacto selling price. Thus, the MSRP is perceived as misleading and not the true market price.

2) Any attempts to sell into the standard distribution system have failed. Because we would be competing directly with our own customers, they cannot possibly sell a watch for $1,200 in store, when it is being sold elsewhere (online) for $300. The 21st century consumer is incredibly price-aware.

If you have made it this far, I commend you. My questions, after a long preamble, is:

1) What is your opinion of this method of high-low selling?

2) If your opinion is unfavorable, which based on my knowledge of branding and your insightful resource will be the case, what does a brand do when it finds itself in this situation? Reset pricing to 3x without mention of the MSRP at 12x? If so, the perceived advantages of “bargain” items (MSRP: $1,200, Your Price: $300) disappears and sales may crater.

3) If the brand wants to charge 12x, will customers pay this? They are used to the brand selling at 3x.”

Thanks for your questions Thomas. First, once an item is sold at a lower price, it is very difficult to sell it later at a significantly higher price. And if the same item is sold in two different selling channels at radically different prices, the place where it is sold at a much higher price will not receive many sales, especially if the lower price is offered online where anyone can find the item at the lower price after a simple search.

A better approach, if you want to begin to sell the brand at the higher price, is to create a new brand that can be sold at the higher price while continuing to sell the original brand at the lower price. This will eliminate channel conflict issues and price conflict issues.

One of the more difficult marketing problems is to take a premium brand down to lower price points. Once that happens, the premium brand loses some of its cache, hopefully traded off with much higher sales volume due to the lower price. It is somewhat easier to eventually move a more mainstream brand up into premium categories but only based on noticeably superior quality and many noticeable upgrades and improvements from the original version of the brand sold at a lower price. In no case is it advisable to sell the same brand at two radically different price points in two different channels. It is much too easy to compare price points across different channels and sources these days.

If you want to maintain the same level of sales as before with the product sold online for the lower price with the much higher MSRP, continue to sell the product at the lower price with the much higher MSRP listed. Don’t eliminate the MSRP or the bargain perception will cease to exist. The new reference price would then become the $300, not the higher $1,200 (or some amount in between).

We hope this help you build your brands Thomas.

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