an empirically derived taxonomy of retailer pricing and promotion strategies

Ruth N. Bolton and Venkatesh Shankar

This article investigates two questions: (1) Are there a small number of stable underlying dimensions that characterize grocery retailers’ observed pricing decisions – despite the fact that these decisions appear to be very complex and different across brands, categories and stores? (2) What are the different types of pricing strategies adopted by grocery retailers? This empirical analysis examines retailer promotion decisions – specifically, deal intensity (depth of deal discount, frequency and duration) and deal support (features and displays) – as well as pricing decisions (relative price and price variation). It explores the underlying dimensions of retailer pricing decisions, classifies retailers’ different pricing strategies, and characterizes their prevalence across brands and stores. The large-scale study is based on grocery store level scanner data on 1364 brand-store combinations from 17 chains, 212 stores and six categories of consumer package goods in five U.S. markets.

Four pricing dimensions -- relative price, price variation, deal intensity and deal support can be used to characterize all retail pricing decisions. Retailers do not use the same pricing strategies for different brands, categories, stores, chains or geographic regions. For example, a retailer will not necessarily offer consistently low prices for all brands and categories in a given market place. Retailers use their intimate knowledge of brands and markets to customize their pricing strategies – either to stimulate the purchases of promotion merchandise or to encourage regular price merchandise purchases on the same shopping trip. Hence, there is an opportunity for manufacturers to develop and exploit information about retailers’ pricing strategies across brands and categories to become a "category captain," to support their brands with targeted marketing efforts, and to build better relationships with retailers.

Prior research and conventional wisdom assume that retailer pricing strategies are implemented at the chain level, as either EDLP or Hi-Lo pricing. Our analysis of pricing decisions in 17 chains, 212 stores, six categories and five markets reveal some surprising insights about how retailers depart from HiLo pricing and promotion strategies when they customize their decisions for a particular brand and store. First, it shows that at the brand-store level, retailers practice five types of pricing strategies, which we label as Exclusive, Moderately Promotional, HiLo, EDLP, and Aggressive pricing---not just two types of pricing strategies as is widely believed. Second, an interesting finding is that the most prevalent pricing strategy is not any strategy close to HiLo pricing strategy as casual observation of chains and their positioning of their pricing strategy may suggest. It is a pricing strategy that is closer to EDLP strategy than any other strategy. The second most prevalent strategy, Aggressive pricing, is not close to a HiLo pricing strategy either. These findings point out that although retailers may signal to consumers a positioning strategy of EDLP or HiLo pricing strategy at the store or chain level, they actually engage in different pricing strategies at the brand-store level.

This apparent contradiction can be explained by the fact that EDLP is simpler to communicate internally and easier to implement. Pricing decisions – as opposed to other marketing decisions -- are the key to profitability for most companies, and nowhere is this more evident than in grocery retailing with its accompanying razor-thin margins. Thus, retailers must become proactive – rather than passive price-takers – customizing price at the brand-store level to local conditions. Our study shows alternative ways that retailers – and their competitors -- can (and do) customize their own pricing and promotion strategies to different brands and stores. Retailers should closely monitor competitor behavior – at specific stores, for specific brands -- to see what pricing strategy is being adopted for a particular brand at a specific store. Only then, can they form reasonable managerial expectations about their competitor pricing, and develop their own strategies.

These results provide a benchmark for assessing an individual store’s pricing decisions. For example, retailers can use our taxonomy to classify their pricing strategy for a particular brand-store combination (or store), and then compare it with the clusters of retailer pricing strategies described in the article. This benchmarking procedure allows the retailer to think about how his/her pricing strategies may differ from competitors’ pricing strategies. Retailers have pricing latitude when they differentiate themselves along non-pricing dimensions (e.g., by coordinating price and promotion, emphasizing different categories, serving different clientele). Consequently, we observe a diverse set of pricing strategies that are (apparently) successful in the marketplace. We offer a systematic approach to benchmarking retailers’ pricing strategies.

A retail store can observe its closest competitor store’s pricing and promotion decisions over a period of time and infer the competitor’s pricing strategy. However, the retailer must be sensitive to the fact that retailer pricing strategies within a given market are inter-dependent. In other words, when a retailer observes its closest competitor’s pricing and promotion decisions, it may well be observing its competitor’s reaction to its own pricing. This paradox raises interesting questions for future research.