Dueling Pricing Strategies

The world of retail price promotion has split into two distinct blocs. While everyday low pricing (EDLP) has vaulted some companies to the top of their sector, the use of promotional pricing (for example, discounts, regular specials and one-time clearance sales) has also intensified. Seasonal markdowns arrive earlier each year, and the amount of marked-down merchandise has seen double-digit increases. Promotional tactics — from coupons and direct-mail offers to e-mail invitations to sales and sweeter loyalty rewards — have proliferated.

Meanwhile, retailers seek to determine if the dollars pouring from their promotion budgets are paying dividends or merely eroding already tight margins. Longtime heavy price promoters wonder if a shift to EDLP will hone their competitive edge. Or, if they stick with promotional tactics, they must decide what proportion of their prices should be promotional, how deeply should they discount, and whether they should advertise both sale prices and everyday prices. Retailers struggle to address such problems with little information about how price-promotion strategy affects sales volume and how competitors will respond.

A new study, “When Does Retail Price Promotion Make Sense?” presents a framework to help retailers evaluate, fine-tune and even radically shift their approaches to price promotion. The authors, Kathleen Seiders, associate professor of marketing at Babson College and Glenn B. Voss, associate professor of business management at North Carolina State University, examine the pricing and promotion strategies of 38 U.S. retailers in 11 retail sectors representing key national competitors (for example, Circuit City and Best Buy in consumer electronics, Kmart and Wal-Mart in the discount-store sector, and Lowe's and The Home Depot in home improvement). On the basis of their analysis of advertisements placed during a five-quarter period, the researchers scored each retailer's price-promotion strategy on three dimensions: price-variation policy (ranging from “everyday pricing with no variation” to “promotional pricing with frequent variations”), price-promotion volume (amount of advertising dedicated to communicating a price promotion) and depth of discount (average magnitude of discount offered on featured sale items). The authors then used the three scores for each company to calculate each sector's overall promotional intensity index.

Next, they rated each sector on two criteria: assortment overlap (how closely retailers' product assortments resemble one another) and assortment lifespan (how quickly a typical assortment loses value or becomes obsolete). In the authors' view, the effectiveness of a retailer's price-promotion strategy hinges on how well that strategy aligns with these two criteria.