Reader Question: What Pricing Strategy Should a Retailer Adopt…EDLP or Hi-Lo?
Ricardo, a reader from Brazil, recently asked my opinion on EDLP and Hi-Lo retail pricing strategies. Ricardo asks a great question, and quite frankly one that has perplexed me since I discussed EDLP and Hi-Lo retail pricing in the Internet Marketing textbook I worked on in 2001. Funny story about that book, a team of us wrote a 700+ page textbook in 100 days to meet an aggressive deadline set by our publisher, McGraw-Hill. Despite the rush, the book was no flash in the pan: it was adopted by over 200 universities, went into second edition in 2003, and is still selling. Despite the stress, the team had a lot of fun working on the book, highlights include my friend George claiming that he ate “1,000 peanut M&M’s” during the 10 day 24/7 homestretch and meeting Academy Award winner Robert DeNiro at our book celebration.
First off, let’s define the EDLP and Hi-Lo:
Retailers, like Wal-Mart, that use EDLP (everyday low pricing) maintain low prices everyday and occasionally run sales (though not with drastic discounts). EDLP retailers focus on creating a brand that consumers trust for everyday low prices on their products.
Retailers, like Macy’s, that use Hi-Lo pricing offer higher everyday prices relative to EDLP retailers (a 1993 study found that EDLP supermarkets had prices that were on average 9% lower than Hi-Lo grocery stores – hence the notion of “Hi” in Hi-Lo). The “Lo” in Hi-Lo comes from the notion that these retailers run frequent promotions (often weekly) that heavily discount some products (often below EDLP). Why use Hi-Lo you may be wondering…it’s to get at the notion of differential pricing (my politically correct term for “price discrimination”). Less price sensitive customers purchase at high prices while more price sensitive customer wait for sales to pay low prices.
Here are some guidelines to think about when deciding whether to use a Hi-Lo or EDLP retail pricing strategy.
- What type of market are you in? Only retailers that offer similar products and are in competitive markets are forced to make this discounting strategy choice. For example, pricing is a key differentiator of retailers selling homogenous products – price is important in a market where two similar grocery stores, located a mile or two apart, sell the same products. Retailers in this market environment have to adopt an EDLP or Hi-Lo pricing strategy. In contrast, Whole Foods (or as my sister prefers to call it, “Whole Paycheck”) offers a differentiated product (natural and organic foods). And while Whole Foods runs occasional specials, discounting is not a primary component of its retail strategy.
- Are your customers price sensitive? Convenience stores like 7-Eleven, even those located close to discount grocery stores (selling the same products at a significant discount), often cater to less price sensitive customers. If your customers are not price sensitive, there’s less of a need to adopt an EDLP or Hi-Lo pricing strategy.
- Do you have a cost advantage? If you are going with an EDLP strategy, it’d be helpful to posses a cost advantage. There should be a measurable difference between your EDLP price and a Hi-Lo retailer’s “Hi” price. Wal-Mart is a classic example of a retailer with lower costs relative to its competitors.
- Who are your customers? Are your price sensitive customers willing to invest in searching for the lowest price (i.e., read weekly circulars)? As a price sensitive shopper, I occasionally get ribbed about my Costco devotion. While I’m sure I could get many items at a lower price by waiting for sales at Hi-Lo retailers, I just don’t want to deal with the hassle. Costco’s pledge not to mark up its prices by more than 14% brings me comfort – I know that anytime I purchase, I’m getting a reasonable deal. Also, I’m a large basket shopper – when I go shopping I want to stock up –thus I’m best suited to shop at an EDLP store. A small basket shopper is more inclined to dart in and out for good deals at Hi-Lo retailesr.
No matter what strategy you adopt, it’s going to take a lot of effort to convey your pricing strategy to customers. Sears, for example, has struggled with relaying its pricing strategy to customers (initially Hi-Lo, switched to EDLP, now back to Hi-Lo).
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