Everyday Low Pricing: A Bargain Offer, Or A Pricing Trick Distorting Value?
Australian merchandise discounters like Bunnings, Chemist Warehouse and now Amazon.com.au have lured your customers away from you using Everyday Low Pricing (EDLP). But does that mean you should use everyday low pricing to get them back?
Many retailers, like you, are debating whether they should use everyday low pricing as a pricing model to compete to win or merely survive. Some have aligned their brands with everyday low pricing to be more like Amazon – whether this is a good match for them or not. Others have been a bit more hesitant to jump on the everyday low pricing bandwagon because they don’t have the marketing budgets or balance sheet to withstand an economic downturn or carry the financial load.
In this article, I’m going to show you how to use everyday low pricing. The factors that make high/low pricing successful. The risk factors that make everyday low pricing a risky proposition.
What is everyday low pricing?
Everyday low pricing is a pricing technique that large brands like Home Depot and Walmart use to set a consistent price that is somewhere between two price levels of the competitor who is using high/low pricing.
High/low pricing is a price-segmentation technique that retailers like Coles and Woolworths use to target a price sensitive customer segment.
A price insensitive customer segment, conversely, consists of customers that value more than just price, perhaps product quality, store layout, range, convenience, customer service. They tend to value the convenience of not waiting for sales to buy their preferred products. They also prefer high priced products because it infers the products they are buying are worth more than lower priced products – even if this is not necessarily the case (psychological pricing).
This approach could be compared to a haggle price environment.
How is everyday low pricing used by Bunnings?
Typically, large brands, like Bunnings use everyday low pricing when they have an accurate read on their customer segments. For example, through price elasticity analyses, tests, trials, simulations, customer focus groups, etc., Bunnings may find that 40% of their price sensitive customer segment are now willing to pay just a 1.5% more for the convenience of not waiting for a sale. At this point, they will introduce everyday low pricing.
Often, retailers that use everyday low pricing effectively have a dedicated pricing and commercial team. They have the strong analytical firepower and excellent competitive intelligence. They are constantly tracking their competitors to set a consistent price for their products – usually, these prices stay relatively close to their competitor’s high low sale price. On top of this, they monitor price change responses, and some have detailed information on changing customer preferences by microsegment.
Walmart is another excellent example of a store using everyday low pricing to wipe out its competition. Its purchasing power coupled with its everyday low pricing strategy allows them to overwhelm their competitors across retailing categories. Ultimately, Walmart can offer customers lower prices than their competitors, and not even have to provide a better selection of products in any given group.
Unlike independent or smaller stores, big retailers like Walmart and Bunnings have more opportunities to set lower prices. They have a pricing team that is continually reading the market and informing their pricing strategy. They also have a much smaller inventory cost than other retailers. Their sales level is constant. They do not need to pay to advertise periodic sale prices. Their volume purchasing means that they get better terms and dating on all their purchases. Put all of this together; they can offer lower prices in the store for price-sensitive customers and the convenience of not having to wait for a relatively low price or discount.
Higher prices help customers raise their internal reference prices. The distinction between high and low prices provides a contrast that humans need to understand and determine value. This is particularly important when the item’s quality is difficult to assess or ambiguous as, for example, is the case for fashion retailing.
Typically, it is difficult for the High /low retailer to guarantee everyday low pricing. However, they can offer customers a perceived gain. Paradoxically, though, raising your customer’s internal reference price can make it more desirable to obtain the low cost. They know they are something of value for a bargain.
Everyday low pricing retailers are more successful than most retailers because they have:
- Fast distribution into a fragmented market
- Broad and narrow ranges or broad and extensive product ranges that highlight their buying power and price dominance
- A firm focus on price and volume
- Good market intelligence and market analytics
- Well timed price promotions
- A dedicated pricing team
- Localised advertising
- A strategic focus to disrupt passive and disjointed sectors
- Agility and resilience
A misalignment between everyday low pricing and your customer base destroys your brand and market position.
It is very uncommon for a single store to use everyday low pricing effectively to drive profitability. They don’t have the analytical firepower, business culture or balance sheet for it.
Ultimately, you should handle an everyday low pricing strategy with care. Everyday low pricing removes the contrast which humans need to determine the value. This resets the conversation to a low price point that lacks significance of meaning.
The Everyday Low Pricing approach (EDLP), when used correctly, can overwhelm competitors across channels and retailing categories – and as many of these big brands above have shown – they don’t even have to provide the best selection or quality of products to increase their share of wallet.
If you don’t know what your customer value is, or what your competitors are offering, then you should not use everyday low pricing.
Don’t lose another dollar implementing the wrong pricing strategy – download our free guide here.