randall case soulution

Upload: sambitdwivedi

Post on 03-Mar-2016

20 views

Category:

Documents


0 download

DESCRIPTION

Retail Pricing

TRANSCRIPT

EDLP versus Hi-Lo

EDLP versus Hi-LoRandalls Departmental StoreRandalls departmental store?IssuesWhy did EDLP/EDFP (more level pricing) fail in Randalls? Why was it successful in the Childrens category?So is Hi-Lo pricing the only way out for Randall? If it wants to continue with EDLP what modifications should it do?2So, basic questions.What is EDLP?How well does EDLP work?What does it take to make EDLP work?When and how should EDLP be employed? Prototypical definition of EDLP & Hi-LoEDLP: The retailer charges a constant, lower everyday price with no temporary price reductions (TPRs)Hi-Lo: The retailer charges higher prices on an everyday basis, but runs frequent promotions where prices are reduced to below EDLP levelEDLPThis strategy stresses continuity of retail prices at a level somewhere between the regular nonsale price and the deep discount sale price of the retailers competitors. EDLP does not necessarily mean the lowest price in the market. A more accurate description of this strategy is everyday same prices because the prices dont have significant fluctuations.Some retailers have adopted a low price guarantee policy in which they guarantee that they will have the lowest possible price for a product or group of products. The guarantee usually promises to match or better any lower price found the local market, and includes a provision to refund the difference between the sellers offer price and the lower price. 5Why EDLP?Brings credibility to prices! Frequent sales leads to customers getting to have a lower reservation price. More level demand: Crowding during sales avoidedEasier sales forecasting and operations managementLower promotion costs: Money can now be used for Brand Building rather than sales promotion; Just see exhibit 10. Randalls out-of-pocket ad. Exp. was $14.6 million, representing $4/capita/year (3.7 million inhabitants, 1st para)implies a national budget of 1 billion!More level service: Crowding out is avoidedStable prices mean comparison Shopping reduced leading to loyalty???Focus shifts from sales to merchandise management.Frequent promotions can lead to customer dissatisfactionEmployee pricing errors get hidden if products are frequently promoted6Hi-LoWith this strategy, retailers offer prices that are sometimes above their competitors EDLP but they use advertising to promote frequent sales. 7Advantages of Hi-LoDiscriminatory pricing possible and therefore same merchandise can be sold to multiple segments at different times. Powerful tool in the hands of sales people. Motivating customers as well.Sign of Quality: The retailer can use the Hi price as an anchor. Just because a sale is on for Louis Phillip shirts, does not make it a poor quality shirt. So the initial impression of quality given by the higher price on the merchandise continues even when the price are lowered leading to perceptions of bargain. In other words, higher transactional utility.8The problem of Price (s)Full PriceFull price with discount taken at checkout (price reduced on Extra Value Days & Billingsville Saturdays etc.)Clearance merchandise priced as re-marked hung on special racks (see page 7)Value Price Page 6Value price on saleEDLP Page 6EDLP on sale

So, what is the problem?So, what is the problem?9Why did EDLP fail in JewelryJewelry is Fashion oriented. Fashion pricing has two problemsIt is tough to set a fair price for fashion! Therefore, anchors given by the seller is crucialIt is also difficult to predict fashion merchandise inventory to the last dot. There will be some merchandise that misses the fashion peak!10With EDLP, one cannot move the merchandise that has missed the fashion peak to the off season sales!So this limits the Open to buy options for newer fashions.What is the correct price for fashion? It is tough. EDLP talks of Fairness. The only way a customer can think of this as Fair if the price falls in the off season.

However, check exhibit 11..If we base our sales increase on 1986, there was an increase of 41% sales in 1987 due to heavy promotionsIn 1988 EDLP was introduced in this categoryThe sales dropped by 16% in 1988 and further 12% during 1989.However, if we compare 1989 sales to 1986, there was a 5% growth. This is what EDLP is supposed to do. It is supposed to level off salesThis begs the question, Do the Randall Managers even understand what EDLP is all about? Is it fair to compare sales of a HI-Lo pricing policy with EDLP?So, did EDLP really fail for jewelry? It is not so evident from the data!So, what would make EDLP a success in Jwellry? The EDLP products have to be branded (like Tiffany heart)A guaranteed ceiling on Markups together with an offer to meet competitors prices Why did EDLP fail in Mens Suits EDLP was tried in Mens suits for 5 months. Two interesting departures from jewelry. Firstly, Mens suits were branded..EDLP works for branded products. Randall guaranteed price matching of that of the competitorAgain, essential for EDLP to succeed.

So, why did EDLP fail in Mens suits?

13When there was a Hi-Lo Price the markup was 54% (i.e. Wholesale Price/ 0.46) = 2.17 * WPWhen there was an EDLP price the markup was 49% (i.e. Wholesale price/ 0.51) = 1.96*WPThus, there was a reduction of only around 10% {(2.17-1.96)/2.17)}. Is this enough to make customers perceive a decrease, when the decrease on a sale is more than this amount?Bigger Question You want to change peoples perception on prices just in 5 months? Feasible?Image of EDLP being associated with poor quality Some brands refuse to be associated with it.

Why did EDLP succeed with Childrens First the Markup on EDLP was 30% as compared to 49% on Hi-Lo. Therefore the price reduction was 27% (compare it with 10% on mens suits)EDLP was offered on 12 strong brands and they were following the leader Kids R Us which was following EDLP.But is it an unqualified success? One thing to note is that the % merchandise for children offered on EDLP has reduced from 45% to 30%. Why? Because, even childrens clothing is becoming more fashion oriented and same problem as with Jewelry.

15So, Wither EDLP?What is EDLP?Technically, EDLP means that a retailer charges a constant lower everyday price without any possibility of TPRs. Mostly retailers have introduced this concept, however non-retailers like Low Cost Airlines and some cars (like Saturn) have introduced it.Why?Reduces UncertaintyIncreases consumer confidence on shelf prices and therefore easy to communicateLowers Operating CostDecreases Service and AssortmentDecreases Advertisement CostsDecreases inventory & warehouse and handling due to predictable demand

16Why Not?Price Discrimination Not PossibleCategory Expansion is not possibleProblem of profitabilityIs EDLP profitable at all?To answer this we need to ask ourselves two questionsWhat would make EDLP work?Is it proper to have EDLP i.e. is it viable?To answer this we need to ask ourselves two questionsWhat would make EDLP work?Is it proper to have EDLP i.e. is it viable?17What would make EDLP work?For EDLP to work, the firm must create sufficient image of low prices for consumer to switchPure Price EffectPure Ad EffectInteraction between the Ad and Price.Therefore, mere setting up of EDLP will not help, it needs to be communicated and communicated effectivelySears and Roebuck could not Wal-Mart couldImp: Product Selective EDLP is a horrible idea

Second Point..The Retailer lowers prices in the hope of attracting more customers , but what is the issue?Unless the new customers are far higher than the installed base, EDLP is a horrible idea. Why?Profits go up or down with increase/decrease in prices. However the range of increase/ decrease is asymmetric. Retailers lose more in case of price decrease than gain on price increase. For every 10% decrease in price to keep the margins same, there has to be an increase on 39% on volumes the other hand an increase in price needs only 15% drop in customer base for same margins!So, for EDLP to workEDLP makes sense when you apply the strategy for the retailer rather than few product categoriesEDLP will work only if your installed base is small. Number of loyal customer are lowSo, if you are a big retailer practicing a hi-lo strategy, and have a substantial market share, EDLP is a strict no-no, no matter how well you communicate.

Ultimate QuestionDoes Shopping Behavior Change with respect to stores pricing format?Depends on the Transaction Utility a customer gets out of the purchase transactionFixed costs and benefitsVariable Costs and BenefitsDrivers of shopping utilityType of Cost/BenefitUtility ComponentDriversFixedBenefitsHabitual Shopping Experience (store loyalty, familiarity)Service Quality (parking, employees, waiting time)Assortment (Breadth and depth of assortment, exclusive labels)Purchase FlexibilityCosts1. Store Location (Distance and Time to reach the store)VariableBenefitsStore Specific Discounts (coupons, loyalty rewards)Habitual Category Purchase Experience (Category Specific price discounts coupons)CostsExpected Price of items on the shopping listHI-Lo have a higher Fixed Utility than EDLPEDLP have a higher variable utility than Hi-LoTotal Utility from ShoppingBasket SizeFixed Utility of Store AUnit Variable Utility of Store AFixed Utility of Store BUnit Variable Utility of Store BShop at Store AShop at Store BThresholdShop at Store A24So,Two ways of improving perceived shopping utilityEither increase fixed utility LocationAssortmentLoyalty Programmes etc.Or Increase Variable UtilityPricesStore Positioning mapService Based Stores (Hi-Lo)WinnerVolume-Based Store (EDLP)LoserHighHighLowLowShopper Perceived Fixed UtilityShopper Perceived Variable UtilityShopper Perceived Fixed Utility26Question of StrategyWhat makes sense for a Hi-Lo and EDLP store?Increase Fixed Utility?Increase Variable Utility?Depends on the segment of customers you want to tapMore specifically, your fixed utility (or disutility) must be traded off with your variable utility (or disutility).This is the issue that was discussed in retail as the Huffs LawSo, back to RandallWhat should Randall do?Can individual departments be on EDLP and Hi-Lo? Or should EDLP and Hi-Lo should be a store strategy? Therefore can Departmental stores that sell across categories and each category having huge assortment ever achieve EDLP?Or in other words, does EDLP restrict assortment? And therefore lowering of costs? i.e. it is not EDLP that reduces costs, but assortment?Understand the causality here. Back to Randall..What is the impact of EDLP?How much should the sales be higher to offset price decrease by EDLP? Is this possible?How much decrease be by so that customers perceive this to be the change in price?Proctor & GambleThis case focuses on Back Door EDLP or EDLPP (Every Day Low Purchase Price)This policy would (according to P&G)Smooth out production process-i.e. thwart forward buying by retailersReduce warehousing, handling and inventory costs for both retailer and manufacturerThis coupled with ECR and EDI will take huge costs out of the channel. But Did it work?But Did it work?30