There are 4 main general pricing strategies, which covers both long-term and short-term pricing considerations:
1) Hi-Lo Promotion
2) Every-day-low Price (EDLP)
4) Premium. Some overlap is possible.
Thus a premium retailer can operate a hi-lo promotional strategy (e.g. Sainsbury’s) whilst an EDLP operator can also offer a premium product range . As the general food purchasing come from the grocery, examples of the pricing strategies from the grocery stores in the UK will be applied in the following discussion to illustrate the situations of the UK’s food retailing.
1.Hi-Lo Promotional Pricing
Retailers using this pricing strategy usually set higher standard prices on most items but offset by special promotions. The following strategies are commonly used:
Seasonal pricing – full price then markdown
In order to sell items when they still have some value to customers, retailer sell products at ‘full price’, and then ‘marking down’ or reducing the standard price of the product in an ‘end-of-seasonal sale’. This is common in clothing retailers.
This is a short-term pricing strategy that the price is cut to extremely low, even loss-making level, and then heavily advertised in order to gain consumer interest. It is only used in cases of extremely competitive action. For example, Tesco and Sainsbury’s used to sold 3p bake beans per can in response to the market entries of Netto and Aldi in the UK’s supermarkets.
Basically, there are 2 drawbacks. Such campaigns will appeal to bargain-hunting customers stockpiling all the items, making other customers feel being cheated by the advertising or publicity. Meanwhile, some supermarket groups will sell a small number of products consistently at below-cost prices, which is unfair to smaller retailers.
competitiveness, not individual product lines. It offered an ‘Unbeatable Value for Money’ guarantee that certain lines would not be undercut locally. Every product was checked nationally and locally against other competitors.
2.Every-day-low Pricing (EDLP)
Retailers offer very competitive prices across entire product range at all times, namely, prices are kept low all the time and are normally only discounted when the product line is discontinued (e.g. Wal-Mart – reliable prices with few or no promotions). The popularity of EDLP has given rise to a new category of retailers called Value Retailers, who concentrate on offering good value to customers by keeping low prices with regular product changes.
Consider Asda and Tesco. Asda is a broad-range multiple EDLP store. Its pricing policy is to introduce permanently low prices through rollback initiatives. The aim is to invest in lower prices and reduce promotions. Prices are primarily determined to be keen with regard to competitor benchmarks.
Tesco is a broad-range supermarket operating a variety of store formats and sizes. Its aim was continually to increase value for money. Its pricing policy was to track overall competitiveness, not individual product lines. It offered an ‘Unbeatable Value for Money’ guarantee that certain lines would not be undercut locally. Every product was checked nationally and locally against other competitors.
Compare / Contrast
Since prices at EDLP stores are always reduced, these retailers do not offer as many promotions. Furthermore, discounts at EDLP stores are typically lower than at other stores, due to the already heavily discounted normal prices. Hi-Lo stores, on the other hand, normally have high regular prices, and then reduce those prices substantially, discounting more frequently than EDLP stores. Therefore, consumers who shop at EDLP stores are less sensitive to short-term price cuts than consumers at Hi-Lo stores.
Different from EDLP, retailers offer products at lower price than the average high-street price and would sacrifice in other areas if necessary. Retailers are referred to as discounters very in character. The terms include:
Porters five forces at Tesco PLC
In detail at how Porters five forces might be applied to the problems facing Tesco PLC, including an investigation of the threat of substitutes from other supermarkets, buyer power in relation to grocery purchases, grocery supplier power, and the power of the customer at the till.
Classical economics predicts that rivalry between companies should drive profits to zero. This is partly down to the threat of substitutes. For instance, Tesco has competition from companies like Sainsbury that can provide substitutes for their goods. This drives the prices of groceries down in both companies.
Buyer power also acts to force prices down. If beans are too expensive in Tesco, buyers will use their power and move to Sainsbury. Fortunately for Tesco, there are few other large supermarket companies. This means the market is disciplined – the supermarkets have a disciplined approach to price setting. Discipline stops them destroying each other in a profit war.
Supplier power is an important part of the Porters five forces model. Implications for Tesco are many. Supplier power is wielded by suppliers demanding that retailers pay a certain price for their goods. If retailers don’t pay the price, they don’t get the goods to sell. But large supermarkets, like Tesco, have an overwhelming advantage over the small shopkeeper-they can dictate the price they pay the supplier. If the supplier does not reduce the price, they will be left with a much smaller market for their produce.
Tesco, Sainsbury and other supermarket chains put up considerable barriers to entry. Anyone starting up a new supermarket chain has barriers imposed on them, implicitly or explicitly, by the existing supermarkets. For instance, Tesco may have cornered the market for certain goods; the new supermarket will not be able to find cheap, reliable suppliers. Tesco also has the advantage of economies of scale. The amount it pays suppliers, per-item, is a lot less than the corner shop. It achieves this, partly, through buying large volumes of goods. A small supermarket chain can only buy a relatively small volume of goods, at greater expense.