Glenn B. Voss and Kathleen Seiders

Price promotion strategy is central to competition in many retail sectors. Retailers' promotion decisions include how many items to promote, how often to promote specific categories and brands, what types of promotions to use, and how deeply to discount. The benefits of regular price promotions are widely recognized and their use is deeply ingrained in the retailing industry. At the same time, the success of retailers that downplay price promotion, for example, Wal-Mart, the Home Depot, and Trader Joe's, has challenged traditional assumptions about the competitive need for promotions. Retailing experts further praise everyday pricing for its ability to increase customer loyalty and reduce expenses.

The everyday vs. promotional pricing debate has been fueled by studies that report conflicting results as to when one or the other strategy may be advantageous. To gain additional insight, we explore how certain competitive factors influence three aspects of price promotion strategy: price variation policy (on a continuum ranging from everyday pricing with no price variation to promotional pricing with frequent price variations over time); price promotion advertising volume; and average depth of price discount. Price promotion strategy measures are obtained for 38 companies in 11 retail sectors by content analyzing all newspaper advertisements – a total of 8030 pages – in five major markets across the U.S. for three consecutive months. The sample of retailers includes prominent national competitors in diverse but major sectors, including discounters, supermarkets, specialty and department stores.

We then examine the extent to which price promotion strategy is linked to retail sector characteristics (assortment perishability and assortment heterogeneity) and differences among companies (retailer differentiation, number of stores and average store size). Better knowledge of these relationships can help retail managers align their price promotion decisions with strategic goals. An expert panel provides measures of sector characteristics and published company data provide measures of firm characteristics. We use hierarchical linear modeling to test the hypotheses and control for local marketplace variations.

The results of our study show strong support for the role of assortment heterogeneity and perishability in determining retailers' price promotion strategy. Operational scale and scope, represented by a retailer's average store size and number of stores, also influence price promotion practices. These findings offer a plausible explanation as to why a dominant approach to price promotion strategy exists in many retail sectors. Our results also suggest that debate about everyday versus promotional pricing should not be conducted at a 'global' level because the advantages of these two strategies are contingent on retail sector and company characteristics.

Our analysis implies that a retailer's price promotion strategy should be consistent with its sector's position relative to assortment heterogeneity and perishability. Our framework and findings further provide a base for suggesting how retail managers can challenge and break away from pricing norms. For example, the traditional department store sector has moderate levels of assortment heterogeneity and perishability and very high promotional intensity. A company choosing to defy that norm – such as Dillard's, which has shifted toward an everyday fair pricing strategy – will need to modify its assortment position by altering heterogeneity (e.g., with expanded private label lines) or perishability (e.g., with higher fashion items).

We found this requirement for the adjustment of assortment strategy in other sectors when a retailer adopted a price promotion strategy not in line with its sector's norms. Such assortment-related moves may ultimately redefine sector determining characteristics.