It wasn't long ago that off-price stores -- outlets that offer brand-name goods at 20% to 50% off retail prices -- were considered the pariahs of the retailing industry. But now these outcasts have moved up the social ladder, and many traditional retailers are embracing them as messengers of a new age in retailing.

Just two years ago, standard-price stores balked at mall locations next to off-price stores, says Barbara Baldwin, editor of Off-Price Outlet Report, a quarterly magazine published by National Mall Monitor, in Clearwater, Fla. They feared that proximity to what they regarded as ragtag peddlers would hurt business. After all, wouldn't many customers browse for what they wanted under crystal chandeliers and then walk a few feet to a spartan off-price store to purchase the same merchandise for less?

Traditional retailers have had a change of heart, though, because off-pricing has been a spectacular success. Cohoes, an off-price specialty store based in Cohoes, N.Y., has increased sales by 20% in each of the past five years. In 1979, according to Management Horizons Inc., a marketing research and management consulting firm, off-pricers had $3 billion in sales, or 3% of the apparel and footwear trade. Their share could be as high as $8.5 billion in 1984, or 5.9% of the market.

Many traditional stores are responding by coming up with discount strategies of their own and by locating next to off-price stores in popular malls. "Pick up any newspaper any day and all the department store ads are sale ads," says Baldwin. "[Up to] 60% of these sales are in the off-price bargain range. So traditional department stores are finding they can compete successfully with off-price stores."

Some off-pricers, in turn, are trying to expand their profit margins by adopting the earmarks of traditional retailers, stocking such merchandise as housewares and cosmetics, for instance. And one off-pricer, Hit or Miss Shops, a division of Zayre Corp., began offering its own private-label brands some time ago. As they yield to the temptation to go up-scale, these off-pricers open opportunities for new retailers to undercut them on price.