Evaluating consumer response to EDLPs

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Abstract

This paper reports on an investigation of factors influencing consumer response to every-day low prices (EDLP) policies. In study 1, an experimental study, sale proneness was found to have a significant effect on attitude toward EDLP and patronage intentions for the store implementing a new EDLP policy. Store loyalty affected patronage intentions but not attitude toward the EDLP. While there were no significant interactions between sale proneness and store loyalty, follow-up univariate tests revealed that consumers’ level of sale proneness has an impact on attitude toward the EDLP policy when store loyalty is low but not when store loyalty is high. In a follow-up survey, a number of predictions regarding the relationships among sale proneness, store loyalty, and income level and the dependent variables of attitude toward EDLP, attitude toward the retailer, and patronage intentions were made and tested. Support was found for all but two of the 9 hypotheses. Implications of the findings for retailers and future research agendas are discussed.

Introduction

Retail pricing strategy has generated much research (see, for example, Bell and Lattin, 1998; Bolton and Shankar, 2003). It is viewed by practitioners as one of the “top five priorities in retail management” (Bell and Lattin, 1998). Retailers have to adopt an effective pricing strategy as part of their efforts to attract consumers, increase store patronage and shopping frequency, and increase quantity purchased (Blattberg et al., 1981; Krishna, 1992, Krishna, 1994; Lal and Rao, 1997). The pricing strategy can be every-day low prices (EDLP) or promotional pricing—HILO (Garretson and Burton, 2003; Lal and Rao, 1997; Pechtl, 2004). Every-day low pricing strategies have become a feature of the promotional landscape (Hoch et al., 1994; Ortmeyer et al., 1991; Popkowski Leszczyc et al., 2000) and have been used by retailers to distinguish themselves from other retailers. Wal-Mart, for example, assures us that it has low prices, always, while Lowe's, the home improvement company, currently touts its every-day low pricing strategy in a new advertising campaign.

The opening vignette points to a problem that a number of retailers have been having: how to respond to the pressures of every-day low pricing used by a major retailer such as Wal-Mart (see also Duff, 2002; Howell, 2005a, Howell, 2005b). These pressures are exacerbated in an environment where consumers are more value-conscious and are likely to search for deals (Ailawadi et al., 2001b). What happens when a retailer that utilizes HILO pricing strategies decides that, rather than having consumers shop around for deals at different times of the week, month, or year, it will institute an every-day low-pricing policy? To what extent is consumer response impacted by different individual factors? These kinds of questions are becoming increasingly more important as retailers struggle to determine the most efficacious policies to attract and hold consumers who patronize their stores and brands.

Some prior studies on consumer responses to alterations in pricing strategies are insightful. Mulhern and Leone (1990) conducted an event study of a discrete change in a store's price format. Their results suggested that sales increased when the store switched from EDLP to HILO. Hoch et al. (1994) investigated the impact of category-level price changes on sales response and found that EDLP gave a small—3% increase in units—win to manufacturers, but represented a big loss for the retailer—an 18% decrease in profits. Ailawadi et al. (2001a) investigated Procter & Gamble's (P&G) shift to EDLP during the period 1990–1996. They compiled data from 24 categories in which P&G had a significant market share. They assessed the impact of the new pricing strategy and found that the net impact of consumer and competitor responses to the new pricing policy was a decrease in market share. This was exacerbated by increases in advertising. Were there underlying individual difference factors that accounted for this pattern of consumer response to EDLPs? With what groups of consumers might EDLPs prove effective?

This article contributes to the discourse on EDLPs by investigating and reporting on the conditions under which consumers might respond differently to an EDLP strategy. The focus of the paper is on the impact of sale proneness and store loyalty (study 1), as well as income (study 2) on attitude toward EDLPs and patronage intentions for a retailer that announces a new EDLP policy. It is based on the real case of a supermarket chain that decided that it would lower prices in a number of product categories, in its efforts to retain customers. Results of the study have implications for this retailer and other marketers who often implement these strategies that they believe are in their and their consumers’ best interest. If consumers respond differently to these policies, based on individual difference factors, then it behooves retailers to take these factors into account in designing price promotional strategies to reach different groups of consumers.

The paper draws on the literature on sale proneness and store loyalty to develop certain hypotheses. It then presents two studies—an experimental study and a survey—that were conducted to glean information on factors influencing consumer response to EDLPs. The results—which show that store loyalty and sale proneness are among individual difference factors and income is a demographic factor that impact consumer response to EDLPs—are presented and discussed. There is also a discussion regarding the limitations of the studies and suggestions as to areas for future research.

Section snippets

Sale proneness

Sales promotional activities account for a significant portion of the integrated marketing communications budget of most companies (Cox Direct, 1998). One type of price promotional activity involves price discounts or temporary price reductions. Marketing communications managers and brand managers usually have a number of objectives for price discounts and sales. They include increasing or maintaining sales, building customer loyalty or trust, encouraging brand switching, getting shelf

Study 1

Participants and design: Participants were 86 students (53% being men, and 47% being women; median age=21) enrolled in undergraduate classes at the Midwestern University. They completed the study in large class sessions in exchange for extra credit. They were told orally that they would be taking part in a study on promotional strategies used by different retailers. The study was a 2 (sale proneness: high versus low sale proneness)×2 (store loyalty: high versus low store loyalty) between

Study 2

Study 1 was primarily exploratory, used an experimental approach, and respondents were from an undergraduate student population. While this may be a good approach for theory-building purposes, the issue of external validity of the findings comes to the fore. For that reason, we decided to undertake a second study, involving a ‘real world’ consumer audience, and using a survey approach. Hence, some alterations were made to the methodology.

We prepared a questionnaire where the information from

General discussion

The studies related to the announcement of a new EDLP policy by an actual retailer and gauged the impact of store loyalty and sale proneness (in the first study), along with income levels (introduced in the survey) on consumer response to this announcement. This was against the background of the retailer having sent out a videotaped message to consumers announcing this new policy. Consumers who were unfamiliar with this retailer were used in these studies. These studies were undertaken in an

Limitations and future research

The results in both studies are based on the experience of one retailer, from one part of the US, and participants in the study were from another part of the country. Though the findings from the second study lend credence to those established in the first study, caution is prescribed when it comes to generalizing the results to other retailers and other geographic areas. However, efforts could be made to replicate these studies with other audiences and with other kinds of retailers other than

Conclusions

The impact of sale proneness and store loyalty is a useful area for investigation for a number of reasons. In the case of sale proneness, these results and others (for example, Alford and Biswas, 2002) have shown that, given differences in responses to price promotions, different marketing strategies can be developed to target consumers based on this construct. In addition, retailers also have to take into account the possible confounding impact of a variable such as store loyalty on consumer

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