Promote Promotional Pricing over EDLP

Promotional pricing—in which your store periodically discounts a specific set of items—usually holds more promise than an everyday low price (EDLP) strategy. One reason is that EDLP is the province of Big Box retailers, and in prolonged price wars on all the merchandise you carry, Big Boxes probably can outlast you.
     More reasons for the superiority of promotional pricing come from an econometric analysis at Stanford University and University of Rochester. The study involved only supermarkets. However, the fact that supermarkets carry a wide range of merchandise and the comprehensiveness of the study’s database indicate to me that the conclusions have a broader application. Included in the econometric analysis were revenue figures and price-format decisions for every retail supermarket and Walmart in the United States from 1994 to 2000.
     An impetus for the study was the entry of Walmart into the grocery business. Some grocery stores, such as Wegman’s in New York, switched to EDLP. Most others competed with Walmart using a promotional strategy.
     EDLP does have certain inventory management advantages for the smaller retailer. Demand is more predictable, allowing supply chains to be better coordinated, less money to be spent on merchandise storage, and less irritation of shoppers because of out-of-stocks.
     However, the Stanford/Rochester study found that, on average, promotional pricing yielded $6.2 million more per year in revenues than did an EDLP format. Moreover, changing from a promotional strategy to an EDLP strategy is expensive. Wegmans Food Market found it necessary to produce countless videos explaining their switch. Beyond educating, other costs of a change from promotional to EDLP include reworking supply relationships and gaining employee acceptance of a bargain store image.
     For the years analyzed, the opening of a Walmart resulted in a revenue loss of about $690,000 a year for the store using a promotional strategy, but about $1.7 million for the EDLP store.
     Shopper psychology research finds still another advantage of promotional pricing over EDLP: The excitement of a special event. In fact, Walmart has had what they call “selective rollbacks” on certain items in order to generate sales from that sort of excitement.
     The Stanford/Rochester researchers say Walmart’s selective rollbacks were an error, contributing to drops in same-store sales among U.S. stores. When customers saw prices going even lower, they questioned the Walmart claim of EDLP on everything.
     If you stay with promotional pricing in your store, you can safely promote your promotions.

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