Bonus cases
Bonus case 9-6
Everyday Low Pricing (EDLP)
Wal-Mart, Kmart, and wholesale clubs such as Costco have had great success with a concept they call everyday low pricing (EDLP). Rather than have relatively high prices and then barrage consumers with coupons and price discounts (a high–low pricing strategy), such stores promote the fact that they offer lower prices every day. Similarly, some manufacturers are offering everyday low purchase prices. Instead of having a relatively high price for products sold to retailers, manufacturers such as Procter & Gamble have everyday low purchase prices. It’s the same concept as EDLP applied to industrial goods instead of consumer goods.
Many retailers have decided to follow the lead of WalMart and others by cutting prices on all their goods. But recent research shows that this isn’t always wise. Dominick’s Finer Foods, with 28% of the Chicagoarea food business, tried an EDLP policy and boosted sales by 3%—yet profits declined by 18%. It has been calculated, in fact, that supermarket volume would have to increase by 39% for supermarkets to avoid losing money after a 7% price drop. Consumers say location is usually their most important factor in choosing a supermarket. Thus, in theory, supermarkets don’t need to have the lowest prices to keep market share.
Usually sales volume falls after the introduction of everyday low prices, but it picks up later. That is true in Europe as well as in the United States.
In spite of the potential drawbacks of everyday low pricing, 7-Eleven implemented it in 250 stores in the Dallas–Fort Worth area. This pricing policy was just one part of an overall revamping of 7-Eleven’s image, including updated interiors, fresh produce, and gourmet items. In fact, 7-Eleven no longer wants its former image of a highpriced convenience store, and is seeking to appear as a small yet viable alternative to supermarkets.
discussion questions for BONUS case 9-6
- As a consumer, would you prefer that your local supermarket offer everyday low prices, offer some products at major discounts (half off) periodically, or offer some combination of the two?
- What could your local supermarket do other than offer low prices or price discounts to win your business (delight you) and still maintain a high profit margin?
- What advantages and disadvantages do you see for manufacturers to offer everyday low purchase prices to retailers? Are manufacturers and retailers pushing price so much that they’re in danger of lowering profits? Is this especially true on the Internet? Why is price competition so common?
answers to discussion questions for BONUS case 9-6
1. As a consumer, would you prefer that your local supermarket offer everyday low prices, offer some products at major discounts (half off) periodically, or offer some combination of the two?
Students will have varying opinions. Shoppers who enjoy shopping for bargains will like the challenge of searching for major discounts and specials. Many would rather know that the overall receipt will be low, not individual items.
2. What could your local supermarket do other than offer low prices or price discounts to win your business (delight you) and still maintain a high profit margin?
Grocery items have a very low profit margin. In order to increase profit, stores can add higher-margin non-food items, such as cosmetics, which also give customers convenience. Some stores are combining multiple functions, such as the Wal-Mart Superstores, which combine grocery, discount, and service functions.
3. What advantages and disadvantages do you see for manufacturers to offer everyday low purchase prices to retailers? Are manufacturers and retailers pushing price so much that they’re in danger of lowering profits? Is this especially true on the Internet? Why is price competition so common?
One advantage for manufacturers is a consistent pricing structure. Rather than offering intermittent discounts with high cost promotion, the cost and profit margin would be relatively stable. Discounts, however, let a manufacturer control its product mix more closely, increasing sales for individual products selectively.
Prices are always easier to lower than to raise. Consumers are able to go online and quickly check comparison prices, making it harder for retailers to raise prices. When price is the primary weapon used, profits will suffer. There are many other, more effective, ways to increase sales.
Chapter 9: Marketing: Product and Price 9.3