EDLP, Hi-Lo, and Margin Arithmetic

TLDR

The study examines the viability of an everyday low price (EDLP) strategy in grocery supermarkets and distinguishes it from value pricing at the back door. Field experiments show that a 10% EDLP price cut raises sales volume by 3% but cuts profits by 18%, whereas a 10% Hi‑Lo price hike reduces sales by 3% but boosts profits by 15%; increasing shallow price deals at higher everyday prices raises volume by 3% and profit by 4%.

Abstract

The authors examine the viability of an “everyday low price” (EDLP) strategy in the supermarket grocery industry. In two series of field experiments in 26 product categories conducted in an 86-store grocery chain, they 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 much to changes in everyday price, they found large differences in profitability. An EDLP policy reduced profits by 18%, and Hi-Lo pricing increased profits by 15%. In a third study, the authors increase 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, they draw a conceptual distinction between “value pricing” at the back door and EDLP pricing at the front door.