Retail Pricing: Beyond EDLP and HiLo James Alford Jeremy Keller Matt Muller

EDLP Everyday Low Prices Strategy Consistently low prices on many brands and categories Used by Food Lion, Lucky, and of course the evil Wal-Mart

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

Other Pricing Strategies Three additional pricing strategies customized to fit brand, category, and market conditions at store level Exclusive Pricing Moderately promotional pricing Aggressive pricing

Changing Retail Landscape Increased competition Retailer consolidation and growth of Wal-Mart Consistently lower prices IT innovations Supply chain management innovations Centralized buyers

Customized Pricing Step 1: Identify key determinants of local store pricing Will include market, store category, manufacturer/brand, customer, and local competition Consistent with recent trends in retail Wal-Mart stocks 60 SKU’s of chili but only 3 SKU’s are carried nationwide

Customized Pricing Step 2: Segment market by store format and cluster Manage price and promotion by store format and clusters, including accommodations for chain size, store size, and demographics Variable pricing easily applied to each format and cluster based on store needs

Customized Pricing Step 3: Choose positions on key dimensions to neutralize price as competitive weapon Pricing decisions influenced by competitors but also by category characteristics (storability), chain position and size, store size and assortment, brand preference and advertising, and customer factors (price sensitivity). Set competitive price points on “known value items” and feature or display them.

Customized Pricing Step 4: Manage promotion intensity to avoid head-to-head competition Intensity of retailer promotions depends on market type, chain size, chain positioning, store size, category assortment, storability, necessity, etc… Focus on “known value items” Consider trade promotion management software for additional support

Customized Pricing Step 5: Create distinctive categories Large category assortment targeted towards price-sensitive shoppers Highly storable items (TP) with high price-promotion intensity Perishable categories that require consisted pricing strategy to manage inventory

Customized Pricing Step 6: Tailor prices by market, category, customer, competitor, and brand Retailers charge lower prices when consumers are more own-price elastic and less own-deal elastic Allow for flexibility for those brands in discretionary categories that are less price consistent (seasonal items)

Summary Increased competition causes need for non-traditional pricing strategies Successful retailers moving from EDLP and HiLo pricing strategies Retailers need to take more of a micro- rather than macro- approach to pricing

From Price to Purchase Price promotion strategy effectiveness depends on how well it is aligned with the retail offering’s assortment overlap and assortment life span Assortment Overlap: Degree to which retailer’s product assortments are similar to, rather than distinctive from, one another Assortment Life Span: Function of the speed at which a typical assortment loses value or becomes obsolete over time

Seven Questions First four serve to position company on the matrix Remaining three help evaluate companies current price promotion strategy

Retail Price Promotion Matrix

Matrix Position Which position defines our sector on the matrix? Is it clearly defined or on the boundary? What is the promotional norm in our sector? Is it consistent with matrix? What is our current strategy relative to price variation, promotional ad volume, and depth of discount? Does it follow sector norm? Will our current or future merchandising strategy change our position on the matrix?

Current Strategy Evaluation How well is current price promotion strategy working? How confident are we in this assessment? If we were to fine tune any of the three promotional dimensions which would they be and why? Is there a need or significant opportunity to pursue a radical shift in our price promotion strategy?