Retail Pricing:Retail Pricing:Beyond EDLP and HiLoBeyond EDLP and HiLo

James AlfordJames Alford

Jeremy KellerJeremy Keller

Matt MullerMatt Muller

EDLPEDLP

Everyday Low Prices StrategyEveryday Low Prices Strategy– Consistently low prices on many Consistently low prices on many

brands and categoriesbrands and categories– Used by Food Lion, Lucky, and of Used by Food Lion, Lucky, and of

course the evil Wal-Martcourse the evil Wal-Mart

HiLoHiLo

Steep temporary price discounts Steep temporary price discounts with higher “regular” prices for with higher “regular” prices for many brands and categoriesmany brands and categories– Used by Kroger and SafewayUsed by Kroger and Safeway

Other Pricing Other Pricing StrategiesStrategies Three additional pricing strategies Three additional pricing strategies

customized to fit brand, category, customized to fit brand, category, and market conditions at store and market conditions at store levellevel– Exclusive PricingExclusive Pricing– Moderately promotional pricingModerately promotional pricing– Aggressive pricingAggressive pricing

Changing Retail Changing Retail LandscapeLandscape

Increased competitionIncreased competition– Retailer consolidation Retailer consolidation

and growth of Wal-Martand growth of Wal-Mart Consistently lower Consistently lower

pricesprices– IT innovationsIT innovations– Supply chain Supply chain

management management innovationsinnovations

– Centralized buyersCentralized buyers

Customized PricingCustomized Pricing

Step 1: Identify key determinants Step 1: Identify key determinants of local store pricingof local store pricing– Will include market, store category, Will include market, store category,

manufacturer/brand, customer, and manufacturer/brand, customer, and local competitionlocal competition

– Consistent with recent trends in Consistent with recent trends in retailretail Wal-Mart stocks 60 SKU’s of chili but Wal-Mart stocks 60 SKU’s of chili but

only 3 SKU’s are carried nationwideonly 3 SKU’s are carried nationwide

Customized PricingCustomized Pricing

Step 2: Segment market by store Step 2: Segment market by store format and clusterformat and cluster– Manage price and promotion by Manage price and promotion by

store format and clusters, including store format and clusters, including accommodations for chain size, accommodations for chain size, store size, and demographicsstore size, and demographics

– Variable pricing easily applied to Variable pricing easily applied to each format and cluster based on each format and cluster based on store needsstore needs

Customized PricingCustomized Pricing

Step 3: Choose positions on key Step 3: Choose positions on key dimensions to neutralize price as dimensions to neutralize price as competitive weaponcompetitive weapon– Pricing decisions influenced by competitors Pricing decisions influenced by competitors

but also by category characteristics but also by category characteristics (storability), chain position and size, store (storability), chain position and size, store size and assortment, brand preference and size and assortment, brand preference and advertising, and customer factors (price advertising, and customer factors (price sensitivity). sensitivity).

– Set competitive price points on “known Set competitive price points on “known value items” and feature or display them.value items” and feature or display them.

Customized PricingCustomized Pricing

Step 4: Manage promotion intensity Step 4: Manage promotion intensity to avoid head-to-head competitionto avoid head-to-head competition– Intensity of retailer promotions depends Intensity of retailer promotions depends

on market type, chain size, chain on market type, chain size, chain positioning, store size, category positioning, store size, category assortment, storability, necessity, etc…assortment, storability, necessity, etc…

– Focus on “known value items”Focus on “known value items”– Consider trade promotion management Consider trade promotion management

software for additional supportsoftware for additional support

Customized PricingCustomized Pricing

Step 5: Create distinctive Step 5: Create distinctive categoriescategories– Large category assortment targeted Large category assortment targeted

towards price-sensitive shopperstowards price-sensitive shoppers– Highly storable items (TP) with high Highly storable items (TP) with high

price-promotion intensityprice-promotion intensity– Perishable categories that require Perishable categories that require

consisted pricing strategy to manage consisted pricing strategy to manage inventoryinventory

Customized PricingCustomized Pricing

Step 6: Tailor prices by market, Step 6: Tailor prices by market, category, customer, competitor, category, customer, competitor, and brandand brand– Retailers charge lower prices when Retailers charge lower prices when

consumers are more own-price consumers are more own-price elastic and less own-deal elasticelastic and less own-deal elastic

– Allow for flexibility for those brands Allow for flexibility for those brands in discretionary categories that are in discretionary categories that are less price consistent (seasonal less price consistent (seasonal items)items)

SummarySummary

Increased competition causes Increased competition causes need for non-traditional pricing need for non-traditional pricing strategiesstrategies

Successful retailers moving from Successful retailers moving from EDLP and HiLo pricing strategiesEDLP and HiLo pricing strategies

Retailers need to take more of a Retailers need to take more of a micro- rather than macro- micro- rather than macro- approach to pricingapproach to pricing

From Price to PurchaseFrom Price to Purchase

Price promotion strategy effectiveness Price promotion strategy effectiveness depends on how well it is aligned with depends on how well it is aligned with the retail offering’s assortment overlap the retail offering’s assortment overlap and assortment life spanand assortment life span

Assortment Overlap:Assortment Overlap:– Degree to which retailer’s product assortments are Degree to which retailer’s product assortments are

similar to, rather than distinctive from, one anothersimilar to, rather than distinctive from, one another Assortment Life Span:Assortment Life Span:

– Function of the speed at which a typical assortment Function of the speed at which a typical assortment loses value or becomes obsolete over timeloses value or becomes obsolete over time

Seven Questions Seven Questions

First four serve to position First four serve to position company on the matrixcompany on the matrix

Remaining three help evaluate Remaining three help evaluate companies current price companies current price promotion strategypromotion strategy

Retail Price Promotion Retail Price Promotion MatrixMatrix

Low High

High-gain promoters Low-gain promoters

Low

Hig

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Assortment Overlap

Variety Promoters • Focused specialists • Promotional pricing is optimal • Increase traffic and protect share with targeted discounts, coupons, and sale events

Price Point Rivals• Efficient generalists• Everyday low pricing is optimal• Reinforce low price image with positional price communication

Broadscope Promoters• Large-scale generalists• Promotional pricing is optimal• Increase traffic and retention with extensive price promotion and loyalty program incentives

Differentiators• Innovators• Everyday fair/high pricing is optimal• Sell select, obsolescent products using targeted discounts, seasonal sales, and retail outlets

Clearout Promoters• Large-scale generalists• Promotional pricing is optimal• Increase traffic, attract fringe customers, and sell obsolescent products with frequent discounting

Matrix PositionMatrix Position

Which position defines our sector on the Which position defines our sector on the matrix? Is it clearly defined or on the matrix? Is it clearly defined or on the boundary?boundary?

What is the promotional norm in our sector? What is the promotional norm in our sector? Is it consistent with matrix?Is it consistent with matrix?

What is our current strategy relative to What is our current strategy relative to price variation, promotional ad volume, and price variation, promotional ad volume, and depth of discount? Does it follow sector depth of discount? Does it follow sector norm?norm?

Will our current or future merchandising Will our current or future merchandising strategy change our position on the matrix? strategy change our position on the matrix?

Current Strategy Current Strategy EvaluationEvaluation

How well is current price promotion How well is current price promotion strategy working? How confident strategy working? How confident are we in this assessment?are we in this assessment?

If we were to fine tune any of the If we were to fine tune any of the three promotional dimensions three promotional dimensions which would they be and why?which would they be and why?

Is there a need or significant Is there a need or significant opportunity to pursue a radical shift opportunity to pursue a radical shift in our price promotion strategy?in our price promotion strategy?