Study Shows Value of EDLP Vs. Promotion

STANFORD, Calif. — Promotional pricing might be the most cost-effective way for supermarkets to battle incursions from Wal-Mart, according to a new study that examined the impact of pricing strategies nationwide during Wal-Mart's aggressive expansion from 1994 to 2000.

The report, from the Stanford Graduate School of Business, found that promotional marketing tended to drive higher revenues ‹ a median of $6.2 million more per store per year — than EDLP at traditional supermarkets, and that switching from a promotional position to EDLP was six times as costly at switching the other way.

Analysis also revealed that the entry of Wal-Mart resulted in a $1.7 million loss in annual revenues for the median incumbent EDLP supermarket, while it resulted in a loss of only $690,000 a year for the median promo store.

"Now we have empirical evidence to show why most stores chose promo pricing and stuck with it during a competitive shock — it earns more revenues and is too expensive to change," said Harikesh Nair, associate professor of marketing at the business school and a co-author of the study with Paul Ellickson, assistant professor of marketing and economics, and Sanjog Misra, associate professor of marketing and applied statistics, both at the University of Rochester.

The report also cited the benefits of EDLP, including enabling retailers to reduce inventory costs, better coordinate supply chains, and reduce the risk of stock shortages by smoothing the demand variability induced by frequent sales.