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EDLP, Hi-Lo, and Margin Arithmetic

Authors:
Stephen J. Hoch
Xavier Drèze
Mary E. Purk

Publisher:
Journal of Marketing
October, 1994, 16-27

Abstract:
We examine the viability of an EDLP pricing strategy in the supermarket grocery industry. We address four questions: (a) What is EDLP in practice? (b) How well does EDLP work? (c) What does it take to make EDLP work? (d) When and how should EDLP be employed? In two separate series of field experiments in 26 product categories conducted in an 86 store grocery chain, we find that a 10% EDLP category price decrease led to a 3% sales volume increase, whereas a 10% Hi-Lo price increase led to a 3% sales decrease. Because consumer demand did not respond very much to changes in everyday price, we found large differences in profitability. An EDLP policy reduced profits by 18% while Hi-Lo pricing increased profits by 15%. We show that an everyday price reduction of 10% requires a sales increase of over 39% in order to maintain existing profit levels, an unlikely scenario in the eyes of most retail experts. In a third study, we increased the frequency of shallow price deals in the context of higher everyday prices and find a 3% increase in unit volume and a 4% increase in profit. Finally, we draw a conceptual distinction between "value pricing" at the Back Door and EDLP pricing at the Front Door.
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