Pricing Models in Retail: What are they?
In today’s retail marketplace you will find 2 main pricing strategies, EDLP or Every Day Low Price and Hi/Lo or High/Low. I will attempt to explain how they both work so that retailers in our market can get a better understanding of how to compete in a market that is getting crowded. 10 years ago it was a completely different story, the only big chain stores to carry supplements were GNC and Vitamin World, then eventually Shoppe. This created a very unique and specialized market where the mom and pop store did very well as SME’s (subject matter experts) with few competitors within 10 miles or so (and in some places, the entire city)
Today, the landscape has changed dramatically. Back when there was only 100 brands and the likes of EAS, Sportspharma, and Twinlabs were on top, distributors were regional and few and far apart. So what happened?
Well besides the internet, mail order eventually popped up. Shortly thereafter, UPS and Fedex came along to add to the fun, creating short delivery times to people’s homes. The rest they say is history.
Back on track, let’s get to pricing models.
EDLP- Every Day Low Price
EDLP is a model many large stores like Wal-Mart use in order to be the low cost leader. EDLP is used best when large buy ins create a steady supply of high turnover products that are purchased often, as a company can leverage its buying power over a longer period of time. As we can see in the graphic to this post, the benefits were:
- Reduced Price Wars
- Reduced Advertising spend
- Higher in stock levels (due to larger buy ins to get discounts from manufacturers and distributors.)
- More controlled forecasts
- Cost averaging
- Large amounts of inventory to move (especially bad on consumables and food)
- Larger credit lines needed to purchase larger orders
- Does not work well on seasonal products or perishable goods
Where does it work best:
- Demand does not drive buying
- a company can float inventory for long periods of time
- places with lots of space
- Suppliers that offer FIFO (first in first out) or JIT (just in time) delivery models
- Company is big enough to warrant all of the above
Where it does not work:
- Seasonal wares
- Food or limited shelf life sellers
- High demand situations (you could be missing profits)
- Extremely Low demand situations (sales may be needed to move product)
- Smaller companies with a small footprint
Hi/Lo or High-Low
Hi/Lo is designed to be mainly sales driven, meaning you wait for certain times of year to buy goods so you can pass along the savings during in store sales. You used to normally see this at stores like Best-Buy and seasonal suppliers like REI. An example would be winter hiking goods like boots and gloves and thermo-insulated coats/clothing. These are items one might not normally buy during the summer (unless you live in the North Pole). But if you could find them, they might be on the Low side to move them to make a place for newer models or seasonal changes.
Pros of High/Low:
- Price Wars increase because the same goods need to be sold during the same time
- Advertising spend increases for visibility
- Smaller retailers that are specialty in nature that used to rely on yearly sales and or shows to get large buy in discounts
- Seasonal goods where demand is high and predictable
- Creates excitement
- Moves goods quickly
- Emphasize quality over quantity
- Forecasting and supply are hard to guess because you don’t know what exactly goes on sale.
- You can run out of goods faster than you can acquire or replenishment is hard to do
- Supply chain management relies on proper forecasting. You can miss the boat
- Expensive to bring visibility in store or to the sale
Where it works:
- High End retailers
- If you can wait for sales
- If you sell seasonal goods
Some other types of pricing strategies:
- Pricing to meet competition
- Pricing above competitors
- Pricing below competitors
One thing to be warned about is a price war. A price war can happen when a company fears market loss due to pricing, mostly by the pricing above competitors model. In most cases, it is driven by fear and is shortsighted due to the fact that not all information about the market may be known. These usually happen as a knee jerk reaction to a competitor changing its pricing in accordance with yours (perceived fear).
Before you decide on a pricing model, you should be able to afford a demographics research of your sales area, known competitors, daily traffic of location (or if online using your metrics to gain info via some sort of analytic software) and population density (for online, this would be akin to daily page views or site-visits x time on site and compared to competitors that are your size i.e. NOT bodybuilding.com) etc. Knowing your market will help you effectively gain a market-share and keep it. Do things that make sense in the long run, not just on a whim (keep your emotions in check). Running a business on emotion is a quick way to bankruptcy.
And remember, there is only one http://www.peopleofwalmart.com/ for a reason.