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Uncommon Sense: When Should You Consider an “EDLP” Pricing Strategy for Your Product?
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Uncommon Sense: When Should You Consider an “EDLP” Pricing Strategy for Your Product?

There is nothing new about a low-price strategy: retailers have deployed it for decades, and continue to do so. The contemporary version of this is termed “everyday low price” (EDLP), and is most strongly associated in this country with Walmart. Walmart popularized this strategy at its inception, when it communicated “Lowest Prices Anytime, Anywhere,” and never deviated from it. In the 1990s, when Walmart became the largest U.S. retailer and branched out globally, EDLP was at full force. Note that the opposite of EDLP is “high-low”: “High” refers to the everyday price, and “low” to the deeply discounted or sale price.

Low price assurances have often been part of a retailer’s vision, but it wasn’t until the mid-1990s that it emerged as a manufacturer pricing strategy. Here, the idea was to redirect all or most trade promotion dollars—historically used to fuel temporary price reductions (TPRs), retail features/ads and in-store displays—into the regular price. For example, instead of suggesting an everyday price of $1.99 for most weeks and a feature price of $1.25 for “deal” or promoted weeks, the funds that would normally be invested to promote the “deal” price in ads and displays—and, indeed, price cuts—are used to drive down the everyday price, which might now be $1.75 or $1.50. There might be a few deals, but this would be very much a secondary part of the pricing strategy.

The EDLP strategy emerged in response to the fact that many CPG household goods, as well as categories such as personal care, baby/family products and healthcare products are low on “expandable usage.” For example, having more bottles of shampoo in the house would not typically lead you to wash your hair more often (not like snacks: having more snack products likely leads to more snack usage). That meant that an emphasis on deals would be counterproductive–because people would buy in bulk only or mostly on deal, without buying more of the product than they would otherwise need.

What products is an EDLP strategy ideally suited to?

Over the decades, we have discovered a number of characteristics that appear to be correlated with EDLP success. Here we take a manufacturer’s point-of-view, because a retailer’s decision to embrace EDLP is almost always an all-product strategy, rather than a discrete protocol for a given product. (Note that there are “in-between” options—specifically, hybrid-EDLP refers to selling some products at a lower-than-market everyday price along with periods of discounting that do not go as deep as high-low.)

Brand, category, retail, and operations dynamics need to be taken into account when considering an EDLP strategy.

Brand dynamics

Corporate Role. A product’s role in the company’s portfolio has downstream implications for virtually every important decision. A marquee product will get a great deal of attention and investment, while a “competitive fighter-product,” whose primary role may be as a spoiler, might receive scant focus. Brands toward the competitive-fighter end of the continuum are natural candidates for an EDLP strategy. After all, once the strategy is established, the product is effectively on auto-pilot, and can simply be managed for efficiency. By contrast, managing high-low products takes a great deal of marketing and sales attention, both as to strategic decisions (how often should the product be promoted and how deeply?) and tactical bandwidth (developing the plans, working jointly with retail partners, etc.) Only a product at the “flagship” end of the portfolio can justify this level of resource.

Brand Strength. Strong brands, almost by definition, have a larger strategic arsenal at their disposal. With the exception of specialty/niche brands, which usually possess high brand equity and provide a benefit unmatched by competition, small brands are typically under a permanent state of siege. They will generally employ a high-low strategy, because trade promotion drives volume and excitement, as well as generating attention and funds from retailers. In addition, volume spikes from trade events may also make the smaller brands appear stronger.

Share Dynamics. This concept is related to brand strength. Imagine a strong brand, “S”, which has a 30 EQ share, and a weaker brand “W”, with a 10 EQ share.* It is likely that, were we to decompose these shares, “S” would have something like a 33 baseline EQ share, and a 25 incremental volume share (for an “average” of 30), whereas “W” would have a baseline share of about 8, with an incremental volume share of about 15. This pattern is driven by two dynamics. First, “W” can grow its incremental volume more from stealing from the competition than vice versa, because “S” already claims so much of the category. Second, “W” will tend to get more than its fair share of trade promotion activity, because of its weaker status will lead it to spend proportionately more. Now, imagine that trade promotion activity vanished, as would be the case in a pure EDLP world. Now the overall EQ share will resemble the baseline share (it won’t be identical, because the baseline share number is affected by promotional activity, but it will be close). This means that “S” actually increases from 30 toward 33 and “W” declines from 10 toward 8. Thus, in a world without trade promotion, stronger brands are advantaged.

Profitability and Price Elasticity Insights. Sometimes, the decision to adopt an EDLP strategy is purely a quantitative matter, and strategic issues don’t come into it:  Using sophisticated price elasticity models, one can calculate whether it is more profitable to deploy an EDLP or a high-low strategy. EDLP products tend to have relatively high everyday price elasticity, and to enjoy relatively low lift from trade promotion activities. High-low products show the opposite pattern—relatively lower everyday price sensitivity and high promotion lifts. (Although it should be noted that promoted elasticity is almost always higher than non-promoted elasticity in absolute terms).

Consumer Metrics. Marketing and sales plans often include consumer metrics objectives, such as “grow penetration by one point,” etc. Consumer metrics also include buy rate and loyalty, and might include performance in key demographics (“grow penetration among Hispanics”).

Certain price-promotion strategies are likely to affect some consumer metrics. For example, a high-low strategy will increase penetration, because deep discounting brings in consumers who do not buy at full price. Of course, the additional penetration one gains from discounting may not reflect high-value consumers. Loyalty, on the other hand, will be more strongly linked to EDLP. A constant, “fair” price generates consistent consumer purchase patterns. Similarly, however, this loyalty may be among fewer consumers. But trading the low-value households generally associated with discounting might still be a prudent move. High loyalty is also associated with higher brand equity. It’s hard to measure, but of such high value that it’s very often an appropriate goal.

Category Dynamics

Category and Product Life-Stage. Products that are both vibrant and at an early life-stage warrant investment and more marketing support. Here, the goal is to drive awareness and interest in one’s product. Often, a variety of marketing and sales activities are deployed. Mature products for which a manufacturer is unlikely to have growth objectives will generally receive less investment (both as regards management bandwidth, as well as actual funds). Another way of putting this, of course, is that EDLP products tend to be those where there is a relatively low level of innovation.

Expandability. Expandability has two components, expandable consumption and expandable purchasing. Products with expandable consumption grow with marketing and sales support and contract when such investments are curtailed. As noted in the introduction to this post, manufacturers consider EDLP first and foremost when there is limited expandable consumption—as noted above, one doesn’t wash one’s hair more often because there is more shampoo in the house. Yogurt, on the other hand, can be eaten for breakfast, lunch, morning snack, afternoon snack, night snack and so on. Thus, yogurt has high expandable consumption. Expandable purchasing is a different dynamic. Yogurt has more expandable consumption than soap, but not necessarily more expandable purchasing. This is because soap can be inventoried, but yogurt expires. Most shelf-stable products have expandable purchasing, because they don’t spoil. However, expensive products (large packages of diapers, personal care goods) have diminished expandable purchasing, because of the outlay required to stockpile them. High-low works better for products with high expandable consumption because consumers stock-up, given the low deal price – and consume more as a result.

Retail Dynamics

Channel & Regional Dynamics. Products that tend to benefit most from EDLP will obviously do particularly well with strong EDLP retailers and geographies. Of course, one shouldn’t reflexively align one’s strategy to one’s retail partners–but it is an important consideration.

Retailer Role. Manufacturers may devise a certain plan for products, but they can be overruled by retailers. A retailer will decide how to price and promote a product based on its general pricing philosophy and particular strategic (and tactical) needs at a given time. A retailer may want to claim the lowest everyday price in a given category (or with a given product), or to drive store traffic through deep discounting and high-impact trade promotions. These objectives will override a manufacturer’s price-promotion plan.

Operations Considerations

Aligning consumer demand with manufacturing processes. Flat consumer demand is not generally regarded as a good thing – but it has benefits that will partly justify an EDLP strategy. There are operational efficiencies to be claimed when both consumer and retail demand are flat, and predictably so. Applying a high-low pricing strategy to a product with flat consumer demand adds both complexity and cost, because it makes both consumer and retail demand unpredictable. Consumer demand goes up and down with high-low–even if it’s flat on average. The costs of a high-low strategy include operational inefficiencies in manufacturing, transportation, etc.

Seasonal Spikes. Flat consumer demand is consistent with EDLP. Products with seasonal spikes (e.g., back-to-school, July 4th grilling, Thanksgiving, Easter, etc.) are more likely to leverage high-low pricing because retailers want to take advantage of seasonal urgency (and, indeed, to create it where they can). Trade promotion, particularly deep discounting, helps drive urgency.

Four insights

There is more here than can be summarized in four lines. That said, it should be noted that ideal EDLP products have most of the following characteristics:

  • They are mature brands in mature categories; thus, there is either no or little growth. Increasing penetration is not a primary objective. Expandability is relatively low. Efficiency is very important, particularly with regard to minimizing both artificial operations spikes and resource-intensive promotion planning
  • Lowering the everyday price offers a better ROI than using the same amount of money for trade promotion budget
  • The brand is strong enough to influence category dynamics
  • The brand thrives in EDLP “country” (geography, retailers, etc.)

Note

*“EQ share,” or “equivalized share”, refers to the adjustments made to make sure comparisons among brands are apples-to-apples.  For instance, a brand whose product contains half the volume of another brand needs to sell two units in order to have the same share as the other brand.