Do Shoppers Benefit When Stores Use Everyday Low Pricing?
Academic research has found EDLP has pros & cons for stores and shoppers.
Posted Jun 27, 2016
In theory, everyday low pricing (EDLP) is a great idea. It refers to a pricing strategy in which a retailer offers its customers consistently low prices on every product, without running sales or price promotions. The store sets prices fairly and then maintains them for a long time (until costs change significantly).
EDLP is supposed to help shoppers by simplifying decision making. They don’t have to worry about whether the item they want will go on sale next week or the week after. (When retailers use the tactic of fluctuating prices between a regular high price and a sale price, it’s called “Hi-Lo pricing”). They can simply see the EDLP price, work out whether it seems reasonable, and make the purchase or walk away.
For stores, too, there are advantages to using EDLP. They can focus the marketing message on quality instead of advertising sales. Plus they no longer have to deal with manic swings in sales as prices fluctuate from high to low, and back again. Forecasting, staffing, and other business practices become easier for EDLP stores.
Many large retailers, most famously Walmart, but also Aldi, Trader Joe’s, and others, have embraced EDLP. In fact, Walmart has built its entire success over decades around the EDLP strategy with its “Always low prices” message.
With such advantages, one would think that EDLP is a win-win for shoppers and stores alike. But that is not the case. The real story is a lot more complicated (and interesting).
Shoppers say they want stores to use EDLP but don’t behave as if they do.
Over the years, in survey after survey, consumers say they would be happier with stores that offered them consistently low prices instead of wild price swings. In other words, shoppers say that they don’t like to be tempted with sales. But in reality, they don’t act this way.
Just ask the former CEO of J.C. Penney Ron Johnson. In 2012, after a massively successful career at Apple where he launched Apple’s retail stores, and at Target where he was responsible for turning it into “Tarjay,” Mr. Johnson took over J.C. Penney. To revive the stale Penney brand, he discontinued its never-ending, complicated sales and switched over to an EDLP approach. He wanted Penney shoppers to feel comfortable with simple and stable pricing. Exactly what Penney shoppers wanted, correct?
No! Things didn’t work out as expected at all. Within a year, Penney’s sales had dropped by 25% and its share price had collapsed by 50%.
Why? Even though Penney shoppers may have said they wanted consistent, everyday low prices in surveys, in truth, they wanted something altogether different. The really wanted the thrill of the hunt when shopping, the anxious and exciting wait for a sale to begin, and the joy of “winning” a deal on some item. EDLP simply does not provide this excitement. Even when weekly sales were not really good deals, but simply prices being inflated and then artificially reduced for the sale, Penney’s core shoppers loved the experience. They abandoned the retailer in droves once it implemented everyday low pricing.
What is the lesson? Never listen to what customers say. Instead closely observe what customers do. They may say they like EDLP but they will behave as if they hate it.
Is EDLP pricing more profitable for stores than Hi-Lo pricing?
The best answer to this question comes from a 1994 study conducted by marketing scientists Stephen Hoch, Xavier Dreze and Mary Purk. They worked with a Chicago area supermarket chain, and conducted an impressive field experiment in which they randomly assigned some stores to EDLP in which prices of 19 product categories like soft drinks, canned soup and breakfast cereal) were lowered. Other stores were assigned to Hi-Lo, and prices were increased. What did the authors find? In their own words:
“We find that a 10% EDLP category price decrease led to a 3% sales volume increase, whereas a 10% Hi-Lo price increase led to a 3% sales decrease. Because consumer demand did not respond very much to changes in everyday price, we found large differences in profitability. An EDLP policy reduced profits by 18% while Hi-Lo pricing increased profits by 15%. We show that an everyday price reduction of 10% requires a sales increase of over 39% in order to maintain existing profit levels, an unlikely scenario in the eyes of most retail experts.
Translating into simple English, the supermarket made more money when it kept its prices high. Lowering prices and keeping them stable simply didn’t generate enough sales to sustain the lower profit margin. For stores too, EDLP doesn’t pay off despite its seemingly obvious benefits.
“Large basket” shoppers are few in number but they love EDLP
So how has Walmart been so successful with EDLP for so long? Are there any customers that like EDLP? In one 2004 study, marketing scientists Vishal Singh, Karsten Hansen and Robert Blattberg were interested in these questions. They studied the effects of a new Walmart supercenter opening. The authors studied the shopping behavior of a competitor supermarket’s customers, located about 2 miles from the new Walmart. Their study covered 20 months of purchases of these customers, approximately 10 months before and after the Walmart opened. What they found was very interesting. Walmart’s opening resulted in the supermarket losing about a fifth (or 17%) of its revenue within 10 months. Which of its customers were attracted to Walmart’s EDLP pricing? This is what the authors had to say:
“We find that a small proportion of customers account for a large proportion of the losses. For example, 10% of the households account for 45% of the store's lost revenue, while 20% of the customers account for almost 70% of the lost revenue. Profiling these households in terms of their observed characteristics, we find that distance to store, while useful, explains little of the variation in household heterogeneity. Households that respond to Wal-Mart are likely to have an infant and pet in the family, and are more likely to be weekend shoppers. Furthermore, we find that these households are large basket consumers.... On the other hand, households that spend a large proportion of their grocery expenditures on fresh produce, seafood, and home meal replacement items are less likely to defect to Wal-Mart.”
The study suggests there is a customer segment that likes everyday low pricing. About a quarter of the supermarket’s customers accounted for the vast majority of the switch and the lowered revenues.
This gives us one potential answer about Walmart’s EDLP success. Walmart has been successful because it has attracted the “large-basket”, infant-and-pet in the family, weekend shoppers that really value everyday low pricing.
It is clear, though, that everyday low pricing is hard to pull off successfully. It sounds great in theory, but does not work as well in practice. That’s why we see so many sales, discounts, and deals in most stores where we shop.