Pairwise testing is a technique that tests all possible combinations of each pair of input parameters to achieve high test coverage with fewer tests. It works by testing interactions between variables instead of all combinations. An example shows how to apply pairwise testing to test a car ordering application involving multiple variables, reducing thousands of combinations to just 8 test cases. Pairwise testing is effective but has limitations if variables or interactions are not well understood. Tools can generate pairwise test cases.