Every Day Low Pricing: Pros and Cons

EVERY DAY LOW PRICING (EDLP) is a pricing strategy that has been a remarkable success for some manufacturers/retailers and a disaster for others. 

                        Despite some rather high-profile failures, the strategy attracts attention among all types of marketers. 

                        Recent reports indicate that 27% of consumer non-durable manufacturers and 23% of consumer durable manufacturers have adopted an Every Day Low Pricing strategy. 

                                                The key question is: “what conditions are most critical for successful implementation of the strategy?”

How it works

EDLP is a low-price strategy designed to enhance the competitive position of the supplier based on the following basic premises:

·          A consistent, competitive price will lead to an even demand for products

·          Inventory and other logistical costs will drop because of better management of product flows.

·          Promotional costs and other forms of trade spending will be reduced.

·          The cost advantages of steady demand and better inventory management will lead to even lower prices.

One of the advantages of EDLP is that it often leads to more consistent or predictable demand.                 Suppliers or retailers are able to more effectively control and forecast production, inventory costs, and shipping costs thus stabilizing demand

                        Since periodic deals are replaced by a single, no-deal low price, there is no advantage to customers to postpone a purchase.

                        Successful EDLP strategies tend to generate large volume sales that allow companies to cut costs and pass these savings along to customers.

                        At the same time, retailers or manufacturers are able to leverage their own buying power to reduce their purchase price. These savings, as well, are then passed along to customers. 

Where it works best

EDLP works best under many of the same conditions that support other low price strategies. Typically, these include:

·          Consumer demand is relatively unaffected by large seasonal variations or other timing considerations

·          The company is able to sustain a low price competitive position through a cost advantage

·          Consumers place little value in waiting for —deals“ on merchandise

·          Suppliers are willing and able to provide just-in-time delivery

·          The company‘s size justifies the investment in the information systems required to manage inventory turns precisely

                        Purchases that can be delayed or timed to coincide with price discounts are often less amenable to an EDLP strategy, while repetitive purchases lend themselves particularly well to this type of pricing.

                        Consumer disposables, such as toothpaste, soap, or groceries, for example, are typically purchased on a daily, weekly or – at most – a monthly basis.

                        Consequently, consumers have less ability to time the purchase of these goods in order to save money.

                        EDLP works well for these types of products, especially at a retail level, because it offers consumers a bundle of low prices on a range of goods that they buy on a regular basis.

Caution advised

                        Seasonal products and services such as tourism and snowmobiles, or highly perishable products such as flowers, have a limited shelf life and discrete time periods during which product or services must be moved. In these situations, EDLP may not be the preferred strategy.

                        EDLP often doesn‘t make sense where demand is so high that price increases are warranted, or when demand declines to the point that price discounts are needed to reduce inventories. Implementing EDLP for some consumer durables is difficult because consumers can often afford to wait for special deals or incentives to buy these products.

Article Written by

Michael Hurwich, President of SPMG

Loyalty Programs: A Defense Against New Competitors

Loyalty Programs: A Defense Against New Competitors 
by Michael Hurwich, President SPMG

Loyalty Programs generally help boost customer retention,

The following case study is a composite made up of the actual experiences of several companies that have adopted loyalty based pricing programs. It has been written to provide an example of a successful program while maintaining the confidentiality of the companies involved.

BACKGROUND

COMPANY (A), a dominant force in the high technology industry, was facing the entrance of a new competitor (Company D). At the time, there were two other significant players in the industry, and while (A) enjoyed a 75%+ market share, some customers were showing signs of dissatisfaction. Complaints that (A)’s dominant position in the market had led to arrogance and an inflexible attitude were becoming more frequent. Indeed, many buyers made no attempt to hide their enthusiasm for the impending entry of a new competitor for Company A. Against this backdrop; (A) began to search for a pricing strategy to defend itself from possible market share erosion while maintaining profitability.

THE DECISION TO LAUNCH A LOYALTY PROGRAM

            

In the search for a defensive pricing strategy, Company A explored the feasibility of implementing a loyalty program. While management was wary of the amount of time and resources that would go into implementing a loyalty program, they also recognized that a loyalty program might be their best defense against the new competitor, for several reasons.

For starters, a loyalty program would send a strong signal to customers that (A) was prepared to recognize and reward their loyalty in the face of new competition. This was an especially important message to communicate, given (A)‘s reputation for arrogance and inflexibility.

            

Management also realized that a loyalty program could be a tactic where pricing details would not be readily transparent to competitors. A loyalty program would thus be unlikely to incite immediate price retaliation from the new entrant. In addition, if successfully executed, the program would provide a long-term competitive advantage to (A) by discouraging customers from diverting business to the new entrant. Finally, management concluded that if they did not implement a loyalty program, the new entrant might.

            

The advantages of being first in an industry to implement a loyalty program are usually enormous. Once a customer has made a commitment to a particular program, it is often difficult to dislodge the customer‘s loyalty. (Consider how often members of a particular frequent flyer program go out of their way to fly with ”their” airline.)

DESIGNING THE LOYALTY PROGRAM

One of the first steps taken by Company (A) in designing the loyalty program was to hold a brainstorming session with the sales force to determine what products or services offered by (A) were highly valued by its customers and, at the same time, not replicable by any of its competitors. During the brainstorming session, the group identified (A)‘s breadth of product offerings as key to implementing a successful loyalty program. In essence, (A) was the only significant supplier of a full systems solution, encompassing both hardware and software. By leveraging off this dominant position, (A) management felt it could also promote customer loyalty.

PARAMETERS OF THE RPOGRAM

The program provided customer discounts based on three major criteria:

·         Percentage of (A)’s product bought relative to purchases from the competition

·         Volume purchased of a single product

·         Number of different products purchased.

THE RESULTS

This loyalty program was a tremendous success for Company (A). Not only was the potential erosion of both margin and sales halted, but many current customers actually increased their purchases. Moreover, although other competitors – including the new entrant – attempted to introduce their own loyalty programs, (A) had achieved the dual advantage of being first in the industry to implement a program, and designing a program based on features that were very difficult for competitors to copy.

 

Knowing when price followship is the better strategy by Michael Hurwich

Case Study


Packaged goods companies have traditionally emphasized market share with the belief that revenue, and profit, will follow. After years of chasing the market leader for share, this case study company refocused on improving the bottom line. Market share stabilized and profit doubled after one year.

Background


At the beginning of the 1980s, Crest was the U.S. toothpaste category leader, in terms of price and market share. Its principal competitor, Colgate, believed it was within striking distance of Crest's leadership and invested heavily in targeted advertising, product improvement and price promotions. For example, Colgate took the lead in product improvements through its anti-plaque formula and developed television spots to appeal to children and young adults. Over the next several years, Crest demonstrated that it was not prepared to cede its leadership status, and Colgate's initiatives were met with strong retaliatory strikes. When Colgate advertised its entire line of oral-hygiene products, for example, Crest directly attacked Colgate in advertising.
Shortly thereafter, both Crest and Colgate began aggressive consumer price promotions to attract new consumers with Colgate offering coupons and —Buy 3 Get 1 Free“ promotions while Crest was sending $1.50 coupons to Colgate users. By 1990 after years of aggressively pursuing Crest, Colgate's toothpaste market share was lower than when it started.

A New Direction


By 1990, Colgate-Palmolive had become increasingly concerned with the reduced profits suffered in its aggressive fight for market share leadership in the toothpaste category. As a result Colgate embarked upon new strategies with the overall objective of protecting margins and increasing profit. Price increases were taken and market share decreased slightly; profits, however, doubled. Colgate, for the first time, was clearly focused on producing profits and avoiding the fight for leadership. Colgate's quest for profit, and not market share, proved to be effective.

Lessons Learned


Brands must have the right levers to achieve and maintain price leadership in any market. Colgate clearly did not have those levers. Colgate did not have the necessary brand loyalty to raise the price ceiling for toothpaste, nor was Colgate able to discipline competitors such as Crest when they undercut its price. In addition, there was no consistent communication or subsequent behavior by Colgate to indicate it could be the price leader. A more profitable alternative for Colgate was to pursue a price followship strategy.
The strong brand equity Crest had earned thwarted Colgate's attempt to increase its market share. When Colgate accepted a second place position in the toothpaste market and changed its focus to margins, profit doubled. By pursuing this strategy, Colgate continued to improve profit while maintaining and even increasing market share.

How to price where customizability is a key selling factor

Now more than ever, attracting stakeholders by targeting them directly is hugely important in successful marketing campaigns. In a society that is run by on-demand information and where customizability is the biggest selling factor, there is a new pressure created on pricing tactics that was relevant before but not nearly to the same extents it is now. Nonetheless too much demand for custom pricing strategies can be very detrimental to the overall objectives of any organization.

The best way to deal with such a high demand for customization is effective use of price promotions.

When dealing with retail pricing, companies typically use price promotions to attract new customers to products in their introductory and growth stages. 

While promotional pricing can be effective in meeting objectives, there is the risk of triggering unwanted customer behavior patterns. Here are three considerations to keep in mind to ensure your customers respond positively, over the long term.

1. Keep the ceiling up

Customers do not think in terms of “promotional price” versus “regular price”. Instead, they form opinions over time of what is a “good” price and what is a “bad” price. Aggressive promotions cause buyers to expect a lower and lower price to consider it “good”. As a result, companies can expect lower volume at regular prices since customers will increasingly see them as unfair or “bad”. As a result, the price ceiling will fall.

In addition, customers generally remember the lowest price they have paid for a product or service with the result that even a limited time special offer can change customer expectations over the long-term.

What to do: Avoid excessively deep price promotions. If building volume is the objective, use a smaller discount and run the promotion longer or more frequently. While you may not experience the same uplift as a deep discount, you will protect the integrity of your regular prices over the long term.

2. Encourage long-term customer loyalty

Many companies view price promotions as a means to build a perception of brand value. In some cases, however, price promotions merely equate to an attempt to buy customer loyalty. For example, in the telecommunications industry promotions such as cash incentives often encourage customers to switch service providers. While these types of promotions may be effective in building volume, they do little to retain it. They say to the customer, “It is all right to be disloyal and switch for a better price”, resulting in customer “churn”, frequent switching among suppliers. Over time, these promotions encourage customers to base their purchase decision primarily on price rather than the value of the product and/or service, often leading to commodity type prices. In addition, this kind of price promotion can alienate your current, loyal customers who are not privy to this type of exclusionary discount. 

What to do: Substitute price reducing promotional tactics with promotions that incentivize consumers to purchase for non-monetary rewards. Promotional gifts and frequent “buyer” credit points are examples. These tactics achieve sales oriented goals while taking the focus away from price in the purchase decision, helping to preserve the perception of quality that surrounds a particular brand. If you feel that you must offer a promotion for switching suppliers, provide a similar incentive to current customers to reward them for being loyal and to help retain the newly won customers.

3. Discourage forward and/or delayed buying

Companies that use price promotions frequently, or during specific times of the year, often find that overall volume does not grow as expected. This occurs usually because of forward and/or delayed buying. Forward buying means that customers stock-up at the promotional price. Delayed buying involves customers waiting to make a purchase in anticipation of a future price promotion.

Over the past 10 years, for example, many cosmetics companies have offered attractive bonus packs to customers. One particular company runs its promotion at the same times in the spring and fall each year with the result that over 50% of its sales occur during these two periods. Customers have been trained to delay purchases until the promotional period and stock up on the product when retailers are offering the promotion. 

What to do: Change the timing, frequency, and depth of your price promotions. Inconsistency will help avoid forward and/or delayed buying. There is no doubt that price promotions, when used appropriately, can be powerful tools in building an effective pricing strategy. However, the key to successful long-term profitable use of price promotions is to achieve an optimal frequency of usage that creates significant volume lifts for the product without encountering any major pitfalls.