From opening its first store in 1962, Walmart has banked on the strategy of Everyday Low Prices (EDLP) –a guarantee to the consumer of a stable low price on every product they buy. Many other retailers have adopted the same pricing strategy to attract customers with the idea that Sam Walton created.
At Boomerang Commerce, we look at things differently—and retailers must do so, as well—because the existing EDLP strategy is under fire, if not already obsolete. Still widely practiced today, EDLP worked very well until the 1990s and 2000s when prices were opaque. Building customer trust through low prices and a cookie-cutter approach of offering the lowest possible price on every product seemed to work.
The digital disruption of retail suddenly brought near-total price transparency. Any consumer can easily compare the price of any product, at any retailer, against any other retailers.
In the digital world, should retailers still rely completely on EDLP as we know it? Does offering low prices on all SKUs make sense?
Our conclusion is NO on both questions.
The new EDLP players need to offer low prices on SKUs that their customers want the most – determined by an “EDLP index” that is unique to each retailer.
For example, take a hot product ‘A’ and a not-so-hot product ‘B’. Let us assume that the retailer has a goal of creating a 10% price differential versus its competitor. How should the retailer distribute the price differential across A and B to create the most attractive offering to its customers?
In the traditional retail environment, the retailer would have priced 10% below on both products, A and B. In the digital world this is suboptimal as Product A is more frequently purchased and is price-compared to a greater extent than Product B. Therefore, the customer cares more about a retailer being 10% lower in A than in B. (It is completely possible that for another retailer B is the hot product and A is not – so the equation reverses in that case).
To account for this unique nature of value driven for your customer, Boomerang defines EDLP index.
∑ (Retailer Price-Competitoior Pricre)* Product Hotness Index / ∑ Product Hotness Index
A retailer’s Product Hotness Index for any given product is likely to differ from its competitors’ PHI for that product. Here’s why: it is derived from two factors ‘Market Hotness’ and “Internal Hotness” Indices. Market hotness is calculated by combining external data such as reviews, ratings, sales rank, the number of bids in Google PLA. A retailer’s Internal Hotness index, on the other hand, is defined by internal data such as sales, orders, and units shipped.
A retailer that over-indexes on products that are “hot” for its customers is the TRUE EDLP player serving the needs of their customers to the fullest, rather than being an across-the-board low-price player.
Want to learn more about the foundation of dynamic pricing strategies for today’s retail battlefield? Take a look at the Price Perception Index white paper and get a step ahead of competitors who are stuck in a pricing Race to the Bottom ?