European Retail Digest

Feature | Retail Pricing

Beyond EDLP and HiLo: A new customised approach to retail pricing
By Ruth N. Bolton, W. P. Carey Chair in Marketing, W. P. Carey School of Business, Arizona State
University, Detra Y. Montoya, Doctoral Candidate, W. P. Carey School of Business, Arizona State
University and Venkatesh Shankar, Professor of Marketing and Coleman Chair in Marketing, Mays
Business School, Texas A&M University

A Changing Retail Landscape pricing strategies are likely to be successful in

today’s competitive markets? In recent work,
Developing a coherent and profitable pricing
these questions have been addressed in a large-
strategy has become an increasingly challenging
scale empirical study (Bolton & Shankar, 2003;
task for grocery retailers in the US. In the past
Shankar & Bolton, 2004). Based on these findings,
decade, the retail environment has become
we argue that US retailers have been forced to
increasingly more competitive due to retailer
construct new innovative pricing strategies to
consolidation and the growth of Wal-Mart.
remain competitive and (in some cases) keep
Innovations in information technology, supply
stores open for business (Bolton et al, 2005). We
chain management and centralised buying have
refer the interested reader to these articles for
significantly reduced retailer costs, where lower
technical details. In this article, we focus on
costs enable retailers to offer consistently lower
lessons for retailers regarding the customisation of
prices than in the past. Retailers wrestle with a
pricing strategies and tactics.
plethora of manufacturer trade deals – and
consumers scramble after price discounts. In some
instances, retailers are offering price discounts in Current Pricing Strategies: The evidence
response to competitive pressures - even when Conventional wisdom is that most retailers use
lower prices do not reflect lower costs. one of two store-wide pricing strategies: EDLP or
HiLo. An EDLP policy entails offering consistently
For example, the recent sale of Albertsons, low prices on many brands and categories. It is
including its Osco drug stores, has a profound practiced by some supermarket chains (e.g., Food
impact on the retail landscape. Supervalu is now Lion and Lucky), as well as Wal-Mart. A HiLo
the number two grocery retailer in the US, while policy is characterised by steep temporary price
CVS continues to strengthen its position in the discounts with higher ‘regular’ prices for many
drug channel with the acquisition of Eckerd and brands and categories. It is practiced by
Osco drug store chains. As new competitors enter supermarkets such as Kroger and Safeway. In
a market, existing retailers are scrambling to contrast, recent research suggests that successful
sustain their market shares and re-evaluating their retailers have an arsenal of different pricing
core marketing mix variables. In an environment of strategies that are customised to fit brand,
centralised decision-making, how can a local category, and market conditions. They include
retailer react quickly enough to stay competitive? exclusive pricing, moderately promotional pricing,
Our research suggests that there may be some and aggressive pricing strategies.
flexibility in pricing decisions depending on local
competitive factors. In fact, we have observed that Bolton & Shankar (2003) analysed data from over
retailers are moving toward an approach we call 200 grocery stores in 17 chains, including Lucky,
“customised pricing.” Dominicks, Jewel Osco, Safeway and Food Lion in
five markets in the US. Data were collected from
How prevalent are price discounts or ‘every day three large cities (New York City, Los Angeles and
low price’ (EDLP) strategies? What retailer Chicago) because they represent a diverse sample

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Issue 49 | Feature

of chains and stores (both large and small), as well combination based on a complex set of factors:
as two moderate-sized cities (Pittsfield, market, chain, store (size, category assortment),
Massachusetts and Marion, Indiana) that are category (storability, necessity), brand
demographically representative of the nation. The (preference, advertising), customer (price
study included a diverse range of product sensitivity) and competitor characteristics. Most
categories, including spaghetti sauce, bathroom remarkably, competitor factors are the most
tissue, liquid bleach, ketchup, mouthwash and dominant determinant. Specifically, retailer
frozen waffles. Altogether, the data base described pricing decisions at the brand-store level are
1364 brand-store combinations from six categories heavily influenced by the relative price level and
of consumer packaged goods in five US markets deal frequency of brands in the same category at
over a two year time period. competing stores.

Our study is different from most prior research for For example, when competitors charge lower
three reasons. prices, a retailer communicates the relative
- Measures were developed to describe retailers’ attractiveness of its offerings through higher price
pricing strategies for each brand-store consistency, lower price-promotion intensity and
combination, rather than chain-wide or store-wide higher price-promotion coordination - while
measures. maintaining lower relative brand prices. Price-
- Four pricing dimensions were measured: relative promotion coordination is strongly associated with
price level within the category, degree of price lower competitor price levels, suggesting that
consistency over time, intensity of promotions or retailers are exploiting the relative cost efficiency
deals, and coordination of deal support with price of coordination (compared with setting prices and
changes. promotions independently). When competitors
- Retailer pricing decisions were considered as offer deals more frequently, retailers are less price
continuous rather than as a dichotomous decision. consistent, offer aggressive promotions, more
For example, pricing consistency could range actively coordinate price-promotion, and charge
along a continuum from low to high, rather than lower prices.
be categorised as low or high.
Lessons for Retailers: Price customisation
Table 1 describes the five retailer pricing Conventional wisdom suggests that retailers
strategies based on these four strategic should customise their pricing to the store
dimensions. clientele’s price sensitivity. Our research reveals
that successful retailers customise prices by many
Shankar & Bolton (2004) discovered that retailers other factors, including competitor prices and
made pricing decisions for each brand-store deals, brand strength, and category storability.
Table 1 | Pricing strategies and the mean scores on the dimensions, clustering by
brand-store
Pricing Relative Price Deal Deal
dimensions price variation intensity support
Pricing
strategy
(% prevalent)
Exclusive pricing (8%) High Medium Low Low
Moderately promotional pricing (14%) Average Medium Medium Medium
HiLo pricing (11%) Average High High High
EDLP (45%) Average Low Medium Medium
Aggressive pricing (22%) Low High Low Medium
Source: Bolton & Shankar (2003)

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 European Retail Digest

Table 2 | How customised pricing differs from related pricing approaches

Traditional Pricing Approaches Customised Pricing

Micro-market pricing
- Price discrimination using targeted coupons - Price of each brand determined by a combination of factors
- Carrying assortments according to local taste - Coupons and price discounts are just one part of a four-
demensional pricing strategy

Value pricing
- Determination of basis of customer value creation - Value pricing could be one price strategy under this
- Adjusting prices by increasing benefits or lowering costs approach
- Fine tuning prices by customer groups according to basis - Tailoring prices is done based on a variety of factors
of customer value such as brand equity and category storability

EDLP
- Maintain lower prices - EDLP strategy may be one pricing strategy under this
- Minimise the variation in deal discounts approach
- Includes other pricing strategies such as exclusive pricing
Hi-Lo pricing
- Maintain high regular prices and vary them little - HiLo pricing strategy may be one pricing strategy under this
- Offer frequent and/or deep discounts approach
- Aggressive pricing is an alternative strategy to HiLo pricing
strategy, but on selective categories
- Includes other pricing strategies such as exclusive pricing
Source: Bolton and Shankar (2003)

We propose a new customised approach that Segment market by store format and cluster
differs from conventional pricing strategies. Table Manage price and promotion based on store format
2 highlights differences between customised and clusters, including accommodations for chain
pricing and traditional pricing approaches. size, store size, and demographics. Variable
Customised pricing comprises the following key pricing can more easily be applied to each format
steps: and cluster based on an outlet’s individual needs.

Identify key determinants of local store Choose positions on the key dimensions to
pricing neutralise price as a competitive weapon
Identify key determinants most relevant to a store In addition to traditional competitors (e.g.
pricing strategy, including the market, store, supermarkets), retail pricing decisions are also
category, manufacturer/ brand, customer, and influenced by category characteristics (e.g.
local competing retailers. This recommendation is storability), chain positioning and size, store size
consistent with recent trends in retail and assortment, brand preference and advertising,
management. Best Buy, Tesco, and Wal-Mart are and customer factors (price sensitivity).
“localising” the product assortments in their Neutralise price by setting competitive price
stores. Rigby & Vishwanath (2006) report that points on “known value items” and feature or
Wal-Mart stocks about 60 SKUs of canned chilli display them.
to respond to diversity in local preferences, but
carries only three SKUs nationwide. We believe
that retailer pricing, as well as product Manage promotion intensity to avoid head-to-
assortment, must be localised to match the head competition
market, store, category, brand, customer and Intensity of retailer promotions depends on market
competitive characteristics. type, chain size, chain positioning, store size,

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Issue 49 | Feature

category assortment, storability, necessity, brand storable and necessary categories (e.g. bathroom
preference, relative brand advertising own deal tissue) have high price-promotion intensity
elasticity, cross price elasticity, and cross deal compared to non-essential categories. Perishable
elasticity. Retailers should focus on “known value categories require a more consistent pricing
items” and also consider trade promotion strategy to manage inventory.
management software for additional support.
Tailor prices by market, category, customer,
Create distinctive categories competitor, and brand
Differentiate categories through distinctive Retailers typically charge lower prices when
product assortments. A large category assortment consumers are more own-price elastic and less
targeted towards price-sensitive shoppers can own-deal elastic, but do allow for some flexibility
result in high levels of coordination of price with such as for those brands in discretionary
promotions and low relative prices. Highly categories (less price consistent).

References
Bolton, R. N. & Shankar, V. (2003) An Empirically Driven Taxonomy of Retailer Pricing and Promotion
Strategies Journal of Retailing 79(4) pp. 213-224
Bolton, R.N., Shankar, V. & Montoya, D.Y. (2005) Recent Trends and Emerging Practices in Retail
Pricing in Retailing in the 21st Century: Current & Future Trends Krafft, M. & Mantrala, M. (Eds)
Germany: METRO
Rigby, D. K. & Vishwanath, V. (2006) Localization: the Revolution in Consumer Markets Harvard
Business Review 84 (4) April pp.82-92
Venkatesh, S. & Bolton, R.N. (2004) An Empirical Analysis of Determinants of Retailer Pricing Strategy
Marketing Science 23 (1) pp. 28-49

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