Price is considered the most effective profit driver among the components of the profit equation:
Profit = (Price x Volume) – Costs
Additionally, among the classical 4Ps of the marketing mix, price is the only variable that directly generates revenues, while the other three elements involve expenditure or investments (El Husseini 2014).
In retail, price can be considered the most important marketing instrument with retail pricing strategy a key priority in retail marketing management.
The two main pricing strategies employed in retail are:
- Every Day Low Prices (EDLP) whereby retailers claim to offer the lowest every day prices to their customers; and
- High-Low Pricing whereby retailers set their prices on a higher everyday level but use price discounts and promotions to attract customers.
Both of these strategies provide unique benefits and limitations to a business’ profit margins and market share.
High-Low Pricing increases profits through price discrimination, the creation of excitement through sales and the possibility for retailers to get rid of merchandise (El Husseini 2014). However, high-low price promotions may also undermine future choice by lowering a consumer’s perception of brand quality and value by training consumers to wait for promotions or by lowering consumer price expectations for the brand (DelVecchio, Krishnan and Smith 2007). In developing price promotions, managers need to decide how to frame the discount for example percentage-off, cents-off, buy-one-get-one free or bonus offers.
EDLP assures customers of low prices, reduced costs and stock outs (El Husseini 2014) however may impact on a consumer’s perception of product and brand quality, and may reduce company credibility.
Both Coles and Woolworths have engaged in a price war through the adoption of a mixture of these pricing strategies. The table below outlines some of what the supermarket giants offer:
High-Low Pricing Strategy
|Coles||Flybuys Rewards||‘Down Down’ Campaign|
|Shell fuel discount vouchers when you spend $30 or more in one transaction|
|Discounts ranging from 20 per cent to 50 per cent|
|Woolworths||Woolworths Reward Scheme||‘Cheap Cheap’ Campaign|
|Caltex fuel discount vouchers when spend $30 or more in one transaction|
|Focus on deeper price cuts on key brands|
The UBS Supermarket Supplier Survey revealed that since 2014 Woolworths has experienced a significant slide in sales, falling share price and increased earnings pressure (Knight 2015). The UBS Survey records how supermarket suppliers rate both Coles and Woolworths across a range of areas and indicates that Woolworths has seen decline across a number of domains as outlined in Figure 1 below. At the heart of Woolworths’ problems is pricing where it lags Coles that has executed a superior EDLP strategy.
Figure 1 – UBS Supermarket Supplier Survey Key Measures (Knight 2015)
Woolworths’ ‘Cheap Cheap’ marketing campaign was a poor copy of Coles’ successful ‘Down Down’ campaign. The UBS Survey suggests that customers prefer to think they are buying ‘value’ rather than ‘cheap’ products as inferred by the campaign negatively influencing consumer willingness to buy. The UBS Survey also confirms that Coles is also better at promotions through better conveying its pricing message (Knight 2015).
The comeback path for Woolworths will require investment in lowering prices to claw back significant market share (Knight 2015). Additionally, there is some evidence that consumers base their store-selection decision on attributes unrelated to market prices such as location, cleanliness, service or product variety (Richards and Hamilton 2005). Woolworths may be wise to target various forms of non-price competition to differentiate themselves from Coles, as outlined in Figure 1 Woolworths lags Coles in several of these key measures including on-shelf availability, overall store presentation and staff caliber.
As evidenced, the choice of EDLP or High-Low Pricing strategy is an important strategic choice retailers face that affects their price image and has significant long-term implications for profitability and local market structure (Ellickson, Misra and Nair 2012).
DelVecchio, D, Krishnan, S & Smith, D 2007, ‘Cents or percent? The effects of promotion framing on price expectations and choice’, Journal of Marketing, vo. 71, no. 3, pp. 158-70, retrieved 29 April 2016, <http://eds.a.ebscohost.com.ezproxy-b.deakin.edu.au/eds/pdfviewer/pdfviewer?sid=4e4cd6e8-ab7b-4847-b84d-dd02eb348f23%40sessionmgr4002&vid=7&hid=4103>.
El Husseini, S 2013, EDLP versus hi-lo pricing strategies in retailing: literature review and empirical examinations in German retail market, Deutsche Nationalbibliothek, retrieved 1 May 2016, <http://eds.a.ebscohost.com.ezproxy-b.deakin.edu.au/eds/detail/detail?vid=11&sid=4e4cd6e8-ab7b-4847-b84d-dd02eb348f23%40sessionmgr4002&hid=4103&bdata=JnNpdGU9ZWRzLWxpdmUmc2NvcGU9c2l0ZQ%3d%3d#AN=759967&db=e000xww>.
Ellickson, P, Misra, S & Nair H 2012, ‘Repositioning dynamics and pricing strategy’, Journal of Marketing Research, vol. 49, no. 6, pp. 750-72, doi: 10.1509/jmr.11.0068
Knight, E 2015, ‘Woolworths v Coles – the report card is in’, The Sydney Morning Herald, June 26, retrieved 1 May 2016, <http://www.smh.com.au/business/comment-and-analysis/woolworths-report-card–plenty-of-room-for-improvement-20150625-ghxo9q.html>.
Richards, T & Hamilton, S 2005, ‘Rivalry in price and variety among supermarket retailers’, Proceedings of the Second Biennial Research Conference, Food System Research Group, Madison, WI, pp. 1-35, retrieved 1 May 2016 <https://www.aae.wisc.edu/fsrg/web/FSRG%20papers/11%20Richards%20Hamilton.pdf>.