Business Psychology - Latest Findings

Article No. 180
Business Practice Findings, by James Larsen, Ph.D.

Every Day Low Pricing

Research explores the merits and demerits of every-day-low-pricing.

Some swear it's a gift from God, others mutter the devil when attributing responsibility, but nearly everyone agrees that every-day-low-pricing is a potent retailing strategy. The problem is figuring out if it's beneficial or damaging.

Rajiv Lal from Stanford University was attracted to the controversy and completed a modeling experiment to try to get some answers. The most important conclusion he reached was to identify a common error grocery retailers often make: they fail to position their stores using prices, advertising, and service in a consistent manner that meets the needs and desires of the dominant type of customer the store hopes to attract.

Here's more:

His experiment revealed that optimal industry profits occurred when promotional pricing stores (Hi-Lo) promoted high levels of service in addition to special deals and when every-day-low-pricing stores (EDLP) promoted lower levels of service in addition to lower average prices. This resulted in cleaner segmentation of customers, giving Hi-Lo stores most of the time-constrained, one-stop shoppers and EDLP stores most of the "cherry pickers."

His research also revealed that optimal industry profits occurred when EDLP stores concentrated pricing advertisements on the total shopping basket savings compared to specific Hi-Lo stores in their market, and when they minimized advertised specials. It also revealed that the best results occurred when EDLP store prices fell between the highs and lows of prices at competing Hi-Lo stores. The best results for Hi-Lo stores occurred when they advertised specials for products from throughout their product mix.

Professor Lal believes one-stop shoppers are willing to pay higher prices for a level of service that saves them time, and that Hi-Lo stores can offer this higher level of service at lower cost than EDLP stores because their customer base is smaller, so their services are provided to fewer people.

Here's an example from a customer's perspective:

Martha only has a couple of hours until she has to pick up little Billy at preschool, so she told her parents to meet her in the lunch counter in the grocery store. She even had them get her a doughnut and coffee so she wouldn't have to order. Before she met them, she dropped off dry cleaning, picked up developed photographs, went to the bank, and then to the post office to mail a package. She also went to the florist, and she picked up some special bakery cookies for the mothers' gathering at her home later in the afternoon.

After finishing all these errands, Martha wheeled her cart through the dry goods section, and the produce section, and then parked her cart and ate a sandwich with her folks. Twenty-five minutes for lunch, a trip through the frozen food, dairy, and meat sections, and she was ready to check out, get to the preschool, and get home before anything melted.

"Amazing thing, this grocery store," she thought as she drove home. "All these services in one place, makes me feel splendid, positively elegant that I'm this efficient."

Martha's folks had also been shopping that morning before they met their daughter, but they had gone to another store, one with lower prices. They confided looks of exasperation to each other when they quizzed Martha about the prices of identical items she had purchased. It seemed everything was more expensive at Martha's store, and their pleas to come along with them to their favorite store brought the familiar "no time" dismissal.

Money means a lot to them, and it doesn't bother them to spend twice as long to complete similar errands or to wait a few minutes to get a free checker to check them out. "We're saving money," they remind themselves.

Reference: Lal, Rajiv, and Ram Rao (1997). Supermarket Competition: The Case of Every Day Low Pricing. Marketing Science, 16 (1), 60-80.

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