Pricing Strategies

I have identifies three main pricing strategies that are widely used in the supermarket industry today. They are: 

·        Everyday Low Pricing (EVLP)

·        High-Low Pricing

·        Retail Promotions

Everyday Low Pricing (EDLP)

Supermarkets utilizing a EDLP-strategy are trying to lure customers into their store by announcing that they have low prices all the time. These stores generally do not offer many deep-discount promotions. Some of the stores that have used this strategy very successfully are:

·        H-E-B

·        Food Lion

·        Winn-Dixe

·        Club Foods

·        Omni

It is worth noticing that EDLP is more popular in the southern part of the United States than in the northeastern areas. 

The basic advantage of an EDLP-strategy is that it is simple and consistent, and thus it is easier to communicate the emphasis on low price to consumers. Also, the EDLP format makes it possible for the retailers to lower operating costs. The low-price strategy can be chain-wide, store-wide, or just category-wide. EDLP store prices are on average 9% below the prices of high-low stores, and the general discount in the EDLP stores is not as steep as in high-low stores. 

But because EDLP strategies lower the retailer margin on each unit sold, profitability depends on both lower operating costs and on the increased demand generated as a result of the lower prices. How can this strategy increase sales? First, by convincing current shopper to buy more from the same store, and second, from encouraging new shoppers to come to the store.

However, the EDLP store must promote low-price image, particularly in comparison to the other shopping options. This suggests that an EDLP strategy needs advertising support to promote the low-price image, in addition to lower prices, in order to succeed. 

High-low Pricing

High-low pricing means to advertise price discounts on certain key items. The store usually lowers the price on key items, which are then advertised in local newspapers, on store coupons, or on distributed flyers. Other items in the store continue to be priced at their regular price. Predictably, these other items are priced high enough to compensate for the deals offered on the featured items.

Some items are more suitable for this pricing strategy than others. For example, soft drinks and pizza sell more quickly at a lower price than detergent. Why? Well, consumers don’t wash more clothes because detergent is sold at a lower price, but they might drink more soda or eat more pizza.

Retailers price this way for several reasons. The first, most obvious reason is to promote store traffic, because low prices on certain attractive products will bring consumers into the store. The second reasons stores use high-low pricing is to convey the impression that the store has low prices, while not actually discounting everything in the store. The price image of the store is a function of the number of discounts offered rather than the cumulative savings. The third reason is to influence the sale volume of different merchandise within the store to achieve greater overall store profitability.

To increase the profitability of high-low pricing, retailers who want to encourage the sales of unpromoted items, can physically place high-margin, unpromoted items close to the promoted items. 

Loss Leaders

A key element in a high-low pricing strategy is loss leader. The price charged to the consumer of these items, are at or below the retailer’s marginal cost, so the store is actually loosing money on every loss-leader item they sell.  Loss leaders are usually shelved in inconvenient locations, like the back of the store or the lower shelves. Why? Because these items are used mostly to lure customers to the store, and once they have gotten them to the store, these shoppers will buy other goods. Sometimes. High-profit items are incorporated into the loss leader display.

From a retailer’s point of view, products that are bought relatively often and with high storage costs should be used as loss leaders, otherwise consumers would ignore the offer or stockpile the loss leaders. Thus the rationale choice for loss leaders are perishables or frequently purchased and consumed products that require a lot of storage space. It is also common for stores to set quantity restrictions to limit how much a consumer can buy at the featured price. Studies have found the following products to serve well as loss leaders:

• Carbonated drinks
• Break
• Eggs
• And flour

Empirical profitability studies found that loss leader strategies produced only a small increase in store traffic, but that store traffic had a positive influence on the sales of both promoted and non-promoted products.

But, there is danger, or disadvantage with using loss leaders. “Cherry picking” has become a problem that hinders the effectiveness of loss leader pricing. “Cherry picking” means that consumers hop form store to store, buying only the loss leader items and not buying the full basket of goods at one store.

Retail Promotions

Retail promotions are the third way for supermarkets to attract price conscious shoppers. One common practice among supermarkets is to promote general discounts for shopping in the store. For example, many supermarkets offer double coupons, which means the shopper is allowed to deduct double the face value of a coupon when the appropriate products are purchased. In this case, the manufacture pays the original face value of the coupon, and the retailer also pays the face value.