Everyday low pricing

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Russian: Стратегия постоянно низких цен

Everyday low pricing (EDLP) represents a pricing strategy that reduces price fluctions by decreasing the frequency and depth of consumer and trade promotions. Fewer price changes generate two major benefits. The first benefit is that more consistent prices result in more consistent demand. This in turn results in more consistent throughput. The reduction of variation in throughput (e.g., inventory level consistency, throughput rate consistency) provides managers with a better ability to accurately forecast labor and capacity requirements. Furthermore, variation throughput reduction associates with improved financial performance, regardless of the underlying level of demand unpredictability.[1] A second and often overlooked EDLP benefit stems from the fact that consistent prices result in fewer errors at various levels in the supply chain. At the manufacturer level, this results in fewer billing errors and hence in an improvement in the length of the order-to-cash cycle and in day sales outstanding. At the retail level, fewer checkout errors are made thereby increasing retail labor force productivity.

From a marketing perspective and putting aside operational issues, we can differentiate EDLP from promotional (PROMO) stores. In reality, EDLP stores are not exclusively promotions free: the depth, breadth, and frequency of promotions at EDLP stores is simply less than those at PROMO stores.[2] The typical "basket-price" at the EDLP store tends to be lower than at the typical PROMO store. The general approach taken by the two types of stores, or their positioning, reflects the "fit" of their marketing strategy to satisfy two different types of markets or market segments. The first segment consists of price sensitive shoppers (sometimes referred to as cherry pickers). They mostly favor EDLP stores, but they will shop at the PROMO stores when discounts are high. Because of price sensitivity, this segment tends to be insensitive to the level of service (they do not require nor look for high service levels). EDLP stores, recognizing these critcial features of the segment, offer lower service levels than PROMO stores. The second segment consists of customers who are more price insensitive, more time constrained, and more sensitive to the retail service level. PROMO stores thus offer discounts on some products to attract cherry pickers and higher prices on other products to attract the time constrained and price insensitive segment. It is especially with the price insensitive segment that high prices ensure "no money on is left on the table." Game theory research on the competition between EDLP and PROMO stores has shown that industry profits are lower when stores adopt the same strategies relative to when different strategies are adopted.[3]

References

  1. Germain,R., C. Dröge and C. Claycomb (2008), “Supply Chain Variability, Organizational Structure and Performance: The Moderating Effect of Demand Unpredictability,” Journal of Operations Management, 26 (5), 557-570.
  2. Springer, J. (2010), "Wal-Mart's New President Returns to EDLP," http://supermarketnews.com/retail_financial/wal-marts-president-returns-edlp-0920/index1.html
  3. Lal, R. and R. Rao (1997), "Supermarket Competition: The Case of Everyday Low Pricing," Marketing Science, 16 (1), 60-81
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