EDLP versus Hi-Lo

Randalls Departmental Store

Randalls departmental store?

Issues
Why did EDLP/EDFP (more level pricing) fail in
Randalls? Why was it successful in the Childrens
category?
So is Hi-Lo pricing the only way out for Randall? If
it wants to continue with EDLP what modifications
should it do?

So, basic questions.

What is EDLP?
How well does EDLP work?
What does it take to make EDLP work?
When and how should EDLP be employed?

Prototypical definition of EDLP & Hi-Lo

EDLP: The retailer charges a constant, lower
everyday price with no temporary price
reductions (TPRs)
Hi-Lo: The retailer charges higher prices on an
everyday basis, but runs frequent promotions
where prices are reduced to below EDLP level

EDLP

This strategy stresses continuity of retail prices at a level

somewhere between the regular nonsale price and the
deep discount sale price of the retailers competitors.
EDLP does not necessarily mean the lowest price in the
market.
A more accurate description of this strategy is everyday
same prices because the prices dont have significant
fluctuations.
Some retailers have adopted a low price guarantee policy
in which they guarantee that they will have the lowest
possible price for a product or group of products. The
guarantee usually promises to match or better any lower
price found the local market, and includes a provision to
refund the difference between the sellers offer price and
the lower price.

Why EDLP?
Brings credibility to prices! Frequent sales leads to
customers getting to have a lower reservation price.
More level demand: Crowding during sales avoided
Easier sales forecasting and operations management
Lower promotion costs: Money can now be used for Brand
Building rather than sales promotion; Just see exhibit 10.
Randalls out-of-pocket ad. Exp. was $14.6 million,
representing $4/capita/year (3.7 million inhabitants, 1st
para)implies a national budget of 1 billion!
More level service: Crowding out is avoided
Stable prices mean comparison Shopping reduced leading to
loyalty???
Focus shifts from sales to merchandise management.
Frequent promotions can lead to customer dissatisfaction
Employee pricing errors get hidden if products are frequently
promoted

Hi-Lo
With this strategy, retailers offer prices that
are sometimes above their competitors EDLP
but they use advertising to promote frequent
sales.

Advantages of Hi-Lo
Discriminatory pricing possible and therefore same
merchandise can be sold to multiple segments at
different times.
Powerful tool in the hands of sales people.
Motivating customers as well.
Sign of Quality: The retailer can use the Hi price as
an anchor. Just because a sale is on for Louis Phillip
shirts, does not make it a poor quality shirt. So the
initial impression of quality given by the higher price
on the merchandise continues even when the price
are lowered leading to perceptions of bargain. In
other words, higher transactional utility.

The problem of Price (s)

1. Full Price
2. Full price with discount taken at checkout (price reduced on
Extra Value Days & Billingsville Saturdays etc.)
3. Clearance merchandise priced as re-marked hung on special
racks (see page 7)
4. Value Price Page 6
5. Value price on sale
6. EDLP Page 6
7. EDLP on sale

So, what is the problem?

Why did EDLP fail in Jewelry

Jewelry is Fashion oriented. Fashion pricing
has two problems
It is tough to set a fair price for fashion!
Therefore, anchors given by the seller is crucial
It is also difficult to predict fashion merchandise
inventory to the last dot. There will be some
merchandise that misses the fashion peak!

 With EDLP, one cannot move the merchandise

that has missed the fashion peak to the off
season sales!
So this limits the Open to buy options for
newer fashions.
What is the correct price for fashion? It is
tough. EDLP talks of Fairness. The only way a
customer can think of this as Fair if the price
falls in the off season.

However, check exhibit 11..

If we base our sales increase on 1986, there was an increase of 41%
sales in 1987 due to heavy promotions
In 1988 EDLP was introduced in this category

The sales dropped by 16% in 1988 and further 12% during 1989.
However, if we compare 1989 sales to 1986, there was a 5% growth.
This is what EDLP is supposed to do. It is supposed to level off sales
This begs the question, Do the Randall Managers even understand
what EDLP is all about? Is it fair to compare sales of a HI-Lo pricing
policy with EDLP?

So, did EDLP really fail for jewelry? It is not so evident from the
data!
So, what would make EDLP a success in Jwellry?
The EDLP products have to be branded (like Tiffany heart)
A guaranteed ceiling on Markups together with an offer to meet
competitors prices

Why did EDLP fail in Mens Suits

EDLP was tried in Mens suits for 5 months.
Two interesting departures from jewelry.
Firstly, Mens suits were branded..EDLP works for
branded products.
Randall guaranteed price matching of that of the
competitorAgain, essential for EDLP to succeed.

So, why did EDLP fail in Mens suits?

 When there was a Hi-Lo Price the markup was 54% (i.e.
Wholesale Price/ 0.46) = 2.17 * WP
When there was an EDLP price the markup was 49%
(i.e. Wholesale price/ 0.51) = 1.96*WP
Thus, there was a reduction of only around 10% {(2.171.96)/2.17)}. Is this enough to make customers
perceive a decrease, when the decrease on a sale is
more than this amount?
Bigger Question You want to change peoples
perception on prices just in 5 months? Feasible?
Image of EDLP being associated with poor quality
Some brands refuse to be associated with it.

Why did EDLP succeed with Childrens

First the Markup on EDLP was 30% as compared to 49%
on Hi-Lo. Therefore the price reduction was 27%
(compare it with 10% on mens suits)
EDLP was offered on 12 strong brands and they were
following the leader Kids R Us which was following EDLP.
But is it an unqualified success? One thing to note is that
the % merchandise for children offered on EDLP has
reduced from 45% to 30%. Why? Because, even
childrens clothing is becoming more fashion oriented
and same problem as with Jewelry.

So, Wither EDLP?

What is EDLP?
Technically, EDLP means that a retailer charges a constant
lower everyday price without any possibility of TPRs.
Mostly retailers have introduced this concept, however
non-retailers like Low Cost Airlines and some cars (like
Saturn) have introduced it.
Why?
Reduces Uncertainty
Increases consumer confidence on shelf prices and therefore easy
to communicate
Lowers Operating Cost
Decreases Service and Assortment
Decreases Advertisement Costs
Decreases inventory & warehouse and handling due to predictable demand

Why Not?
Price Discrimination Not Possible
Category Expansion is not possible
Problem of profitability
Is EDLP profitable at all?
To answer this we need to ask ourselves two questions
a.What would make EDLP work?
b.Is it proper to have EDLP i.e. is it viable?

What would make EDLP work?

For EDLP to work, the firm must create sufficient image of low
prices for consumer to switch
Pure Price Effect
Pure Ad Effect
Interaction between the Ad and Price.

Therefore, mere setting up of EDLP will not help, it needs to

be communicated and communicated effectively
Sears and Roebuck could not
Wal-Mart could

Imp: Product Selective EDLP is a horrible idea

Second Point..
The Retailer lowers prices in the hope of
attracting more customers , but what is the
issue?
Unless the new customers are far higher than the installed base,
EDLP is a horrible idea. Why?
Profits go up or down with increase/decrease in prices. However
the range of increase/ decrease is asymmetric. Retailers lose more
in case of price decrease than gain on price increase.
For every 10% decrease in price to keep the margins same, there
has to be an increase on 39% on volumes the other hand an
increase in price needs only 15% drop in customer base for same
margins!

So, for EDLP to work

EDLP makes sense when you apply the strategy for
the retailer rather than few product categories
EDLP will work only
if your installed base is small.
Number of loyal customer are low

So, if you are a big retailer practicing a hi-lo strategy,

and have a substantial market share, EDLP is a strict
no-no, no matter how well you communicate.

Ultimate Question
Does Shopping Behavior Change with respect
to stores pricing format?
Depends on the Transaction Utility a customer
gets out of the purchase transaction
Fixed costs and benefits
Variable Costs and Benefits

Drivers of shopping utility

Type of
Utility
Cost/Ben Compone
efit
nt

Drivers

Fixed

Benefits

1. Habitual Shopping Experience (store loyalty, familiarity)

2. Service Quality (parking, employees, waiting time)
3. Assortment (Breadth and depth of assortment, exclusive
labels)
4. Purchase Flexibility

Costs

1. Store Location (Distance and Time to reach the store)

Benefits

1. Store Specific Discounts (coupons, loyalty rewards)

2. Habitual Category Purchase Experience (Category Specific
price discounts coupons)

Costs

1. Expected Price of items on the shopping list

Variable

 HI-Lo have a higher Fixed Utility than EDLP

EDLP have a higher variable utility than Hi-Lo

Total Utility from Shopping

Unit Variable Utility of Store B

Unit Variable Utility of Store A

Fixed Utility of Store A

Fixed Utility of Store B

Shop at Store A

Threshold

Shop at Store B

Basket Size

So,
Two ways of improving perceived shopping
utility
Either increase fixed utility
Location
Assortment
Loyalty Programmes etc.

Or Increase Variable Utility

Prices

Store Positioning map

Shopper Perceived Fixed Utility

High

Low

Service Based
Stores (Hi-Lo)

Winner

Loser

Volume-Based
Store (EDLP)

Low

High

Shopper Perceived Variable Utility

Question of Strategy
What makes sense for a Hi-Lo and EDLP store?
Increase Fixed Utility?
Increase Variable Utility?

Depends on the segment of customers you want to

tap
More specifically, your fixed utility (or disutility) must be
traded off with your variable utility (or disutility).
This is the issue that was discussed in retail as the Huffs
Law

So, back to Randall

What should Randall do?
Can individual departments be on EDLP and Hi-Lo? Or
should EDLP and Hi-Lo should be a store strategy?
Therefore can Departmental stores that sell across
categories and each category having huge assortment ever
achieve EDLP?
Or in other words, does EDLP restrict assortment? And
therefore lowering of costs? i.e. it is not EDLP that reduces
costs, but assortment?Understand the causality here.

Back to Randall..
What is the impact of EDLP?
How much should the sales be higher to offset
price decrease by EDLP? Is this possible?
How much decrease be by so that customers
perceive this to be the change in price?

Proctor & Gamble

This case focuses on Back Door EDLP or
EDLPP (Every Day Low Purchase Price)
This policy would (according to P&G)
Smooth out production process-i.e. thwart
forward buying by retailers
Reduce warehousing, handling and inventory
costs for both retailer and manufacturer
This coupled with ECR and EDI will take huge costs
out of the channel.

But Did it work?