What is EDLP and why does it matter?
Whether it’s using round numbers for prices or a gimmicky, large red hand accompanied by an ageing band to indicate that “down, down, prices are down” or a simple showing of per unit costs, pricing strategies are continually in the spotlight. Both major retailers in Australia, broadly follow an ‘everyday low prices’ (EDLP) pricing strategy. But an EDLP pricing strategy is not just for the supermarket duopoly and might be worth investigating to see if it’s right for your brand.
The history of ‘everyday low prices’
Traditional retailing was about High-Low Pricing – where “high” refers to the everyday price and “low” refers to the discounted price during a sale. In 1994, Sam Walton, CEO of Walmart and the grandfather of modern retail, implemented a “Lowest Prices Anytime, Anywhere,” strategy and never deviated from it. Instead of relying on seasonal planned and unplanned sales with large percentage discounts, retailers now fought to actively competed on price everyday.
The EDLP strategy arose from the fact that many household items such as personal care and healthcare products, were typically being bought in bulk on discount rather than encouraging purchasing when the product was needed. EDLP meant that rather than a product being priced at its highest possible price, then reduced to its lowest possible price, it could be priced somewhere in the middle to encourage frequency of purchasing. EDLP can thus increase customer loyalty and stablise revenues throughout the year.
An EDLP pricing structure also means that fixed costs are lower. Marketing costs are reduced due to only needing one campaign (as the ‘down, down prices are down’ jingle repeatedly shows us) as opposed to many advertising campaigns for each promotional sale. Inventory management costs are also lowered as sales volume expectations are more stable and not subject to peaks from sale activity.
Which retailers are suited to EDLP
In assessing EDLP versus High-Low Pricing, the Stanford Business School found that in many markets, high-low pricing results in higher revenue as consumers are still conditioned to only buy during sales. That said, the rise of price comparison sites and the fact that according to Market Track, 80 per cent of shoppers in the US compare prices online before shopping in stores, EDLP may be short-term pain to realise long-term gains in terms of customer loyalty as your business grows.
Typically an EDLP-ready retailer is more mature – there are fast diminishing returns on marketing dollars spent to create incremental traffic. Additionally the retailer is likely to have a strong enough brand and/or market share, such that an EDLP pricing strategy enables them to compete on price and ideally drive prices. Finally according to a Nielsen study, geography matters – in regions that have a large EDLP practices, consumers are more likely to favour EDLP over discount behaviour.
The Australian Experience and hybrid-EDLP
The Australia experience was slower, but in April 2015, Wesfarmers took steps to move Coles towards EDLP which was closely followed by Woolworths – it signaled a new price war on key items such as milk and bread, and even the ‘$8 roast chicken’ market. Now all of the major brands under Wesfarmers (Kmart, Target (in transition), Coles, Officeworks, Bunnings and Woolworths (supermarkets, Dan Murphys, Big W) offer EDLP pricing. However looking inside the details, one realises it’s more of a ‘hybrid-EDLP’ pricing strategy if anything.
For most of these retailers EDLP, is supported by a Price Guarantee, where the retailer will either match or beat a cheaper price elsewhere. Notably, the terms and conditions often indicate that the Price Guarantee does not extend to competitors that are online-only retailers or the competitor retailer must be within a 10km radius. Notably Bunnings and Officeworks face heavy competition from online, yet have maintained pricing strategies regardless.
These retailers all also use coupons and loyalty cards offering bundled deals (ie. Buy 6 get 1 free) which in effect also circumvent the premise of EDLP. Effectively these retailers are attempting to gain the marketing advantage of offering EDLP but by excluding key competitors or by using bundles they are actually a hybrid pricing model to optimise sales and customer loyalty.
In the context of any other retailer, hybrid-EDLP pricing demonstrates how to balance ‘pricing perception’ to maximise gains. Provided your brand strength, market share and relative overall maturity in your market supports this pricing strategy, EDLP is worth considering a switch to – doing so you can not only save on fixed marketing and sourcing costs but also gain customer loyalty for the long term.
Arani Satgunaseelan is a principal consultant at ADP & Co, a management consultancy specialising in strategy and analytics for the retail sector. Arani can be contacted at [email protected].