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Competing Price Strategies Make Supermarkets the Winners
STANFORD BUSINESS SCHOOLã When it comes to the supermarket business there is little room for error. Margins are razor-thin compared to the profits enjoyed by other retailers. That makes grocers keenly aware of pricing strategies. Most stores focus on one of two popular practices: Limited promotional specials or across-the-board low prices every day. Stanford Business School Marketing and Management Science Professor Rajiv Lal went shopping to find out why the low price leaders who offer the cheapest daily prices do as well as they do.
Working with University of Texas School of Management Professor Ram Rao, Lal found that both types of stores actually benefited from the other's strategy. The researchers looked at how consumers purchased a basket of goods, tracked price announcements by stores, factored in consumer expectations of unannounced prices, and examined service, convenience, location, and advertising. Lal and Rao also included data from the trade press and store surveys.
They discovered that consumer choices were based on more than just price. They found that the promotional store offered a higher service level, such as longer hours and a greater assortment of goods, as desired by busy consumers. "If you look at Safeway in the last several years, they've emphasized the deli, better produce, a wine selection, and flowers. When you check out they say, 'Thank you Mr. or Mrs. so-and-soπ and carry the groceries to your car." Safeway, a "hi-lo" store using a promotional price strategy, has used its assortment, services and the quality of goods in the store as a way to market to the high end of the consumer population which is often time constrained and willing to pay more for convenience.
The every-day-low-price store, such as Lucky, also appeals to the busy segment of the consumer population by offering locational convenience and lower basket prices, avoiding the need to search for deals. Moreover, it has a lower service level, such as no carryout service, and also appeals to ≥cherry pickers≤ who are highly focused on price and have more time to shop. Lal and Rao found that the most successful of these stores used advertising very effectively to communicate the comparatively low cost of a total basket of goods at their stores.
Lal and Rao concluded that ã in contrast to the traditional view of segmentation in which different items in a product line are designed to appeal to different market segments ã both types of stores had actually developed multi-dimensional positioning tactics rather than pure pricing strategies. For example, although the promotional store offers a higher level of service to attract time constrained consumers, it does not forego the cherry pickers. In fact, it uses random promotions to attract them. On the other hand, the low price store offers a lower level of service consistent with the needs of cherry pickers but also attracts a busy customer through the promise of a lower bundle price.
Both types of stores attack both market segments in two different ways. The result is that both stores can make more money than they would if both stores attacked theses segments on price alone. When two stores have the same pricing strategy, promotions have to be deeper or more frequent, which erodes profits. "The stores end up making more money by differentiating themselves," says Lal.
By Barbara Buell
July, 1997
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