EDLP versus HI-LO pricing - ESIChalf of their promotion budget (Vazquez and de la Ballina, 1996)....

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EDLP versus HI-LO pricingFrancisco Javier Rondán Cataluña

Jorge Arenas Gaitán

Departament of Business Administration and Marketing

University of Seville

AbstractThe main objective of this paper is to offer a description and comparison betweenevery day low prices (EDLP) and high and low (Hi-Lo) pricing strategies, furt-hermore a customer profile of both types of retailers’ clients is presented. We focu-sed on retailing of frequently purchased products. The multinomial nested logitmodel has been applied to a consumer panel data. The main conclusions of thepaper are that EDLP chains offer prices and promotional activity below Hi-Lochains.

1. IntroductionAspects related to the potentially harmful effects of an excessive promotional acti-vity have stimulated discussion about the relative value of the EDLP versus Hi-LoPricing. The literature comments a lot of positive aspects of both strategies. In thefollowing table the main aspect of the each strategy are detailed.

may · august 2004 · esic market

edlp vs hi-lo pricing

Despite the numerous advantages of EDLP, the amount of retailers which useHi-Lo pricing is higher. That is why controversy between both kinds of price stra-tegies is up to date. We think that to decide which is better in relation to the mar-ket, or customers and the real differences between them, is very important withinthe study of price strategies of retailing sector.

The main objective of this research is to study, to describe and to compare thepricing strategies (EDLP and Hi-Lo pricing) in order to help the companies to deci-de the best price strategy taking into account costs, customers and competitors. Soas to help customers to know both strategies, consequently, they will be able tochoose the type of retailers more suitable to their preferences. We also offer a cus-tomer profile for establishments with both types of pricing. In relation to that, westart by analysing high and low prices or promotional prices, going on with a vastexplanation of EDLP. The following step will be the exposition and justification ofthe goal and hypothesis of the research. The next paragraph is focused on the met-hodology based on hierarchical multinomial logit, where we can also explain theused data in the empirical part. Later the main results are exposed to finish withthe conclusion, limitations and future researches.

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Table 1. Comparison between ELDP and Hi-Lo Pricing

Every Day Low Prices (EDLP)

Prices wars are reduced.Merchandising and promotions are reduced.Personnel used more efficiently.To improve inventory management.Retailers can concentrate on being a seller more thana sale purchaser.The purchaser spends less time on managing the pro-motional events dedicating more time on all the pro-ducts.More attractive for the consumer: the price seems tobe more honest.

Hi-Lo Pricing

Prices discrimination. Goods attracts to multiplemarket segments.It creates excitation.All goods can be sold along the time.Confusion on prices reduced prices consciousness(awareness).Initial high prices drive consumers’ judgements aboutproducts’ quality.EDLP may be very difficult to keep.

Source: Adapted from McGoldrick, Betts and Keeling, 2000.


esic market · may · august 2004

2. Hi-Lo pricingWe would better start by defining this strategy which consists on high pricing ini-tially, during a short period of time, and them there is a discount over the goods forthe most of the sales time, going back to the high prices occasionally. The sense ofthis policy is to distinguish between consumers and the products’ line. High and lowprices offer the opportunity to improve margin by selling with higher margins toconsumer who are not sensitive to prices, and they also imply more margin in lessimportant lines. Promotions and bargains are used to impress the customers, byusing competitive prices in products that are easy to compare. Fixing high and lowprices attracts sensitive consumers to prices, since they give them the opportunity tofind some genuine bargains, when prices are on low levels. With this strategy all con-sumers who are not sensitive to prices will buy without taking into account the pro-motions, while sensitive ones will wait to big sales, that are possible because the exis-tence of non-sensitive customer groups, because, if they did not exist, all consumerswould buy when there were sales, and if this happened retailers would decrease theirincome and, consequently, they ought to diminish or remove those price promo-tions. It is important to know the origin of this pricing strategy as we know it nowa-days, so in USA, in the seventies, the big stores began to suffer the competitivenessof retailers, which operated with lower operation costs and sold similar products ina much lower price. To overcome this situation, the big stores started to increasetheir amount of sales by means of discounts. Big stores were increasing their salesand margins, wile the consumers answered to the increasing number of sales.

One day promotions, where the sales represented a big percentage of retailingstocks, became very popular (Kauffman et al., 1994).

Hi-Lo Pricing Ethics

The real practice of Hi-Lo pricing has been examined by governments of manydeveloped countries. The purpose of this examination is to know if Hi-Lo pricesare deceitful, when the most expensive price is named in advertisements and in thelabels as a regular, original, previous price. The potential delusion takes placewhen, these regular, original, or previous prices are higher than the common or

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general market price of the products, when they are presented like sales, the tran-saction seems to imply higher value for the consumer (Kauffman et al., 1994).

Making reference to retailing regular or general prices in the advertisements,which show special prices, offers to the consumer information that hypothetically,is used by them to determine the product perceived value. If it is a real price, theinformation will help the consumers to decide better their purchases, on the con-trary, if it is a false reference price, the customer decision process may not be per-fect. A politic based on Hi-Lo pricing would be related to the increased quality ofthe product (emerged from a price which is higher than the general) and the con-sumer disappointment, by buying a product with a lower quality than the propo-sed (Kauffman et al., 1994).

Consumers can think that rational retailers, which know the market condi-tions, fix and fasten their regular prices to be competitive. These can be used bythe consumers to fix their internal reference prices of the available alternatives(competitors). The direct effect of this inference is to limit the active consumersearching for information about competitive prices. In many products’ categories,consumers have been exposed to a continuous sales’ activity and many of themhave become sceptic about savings. This may infer that the advertised price as asale is actually the regular price, so, it is the discounted price, which the most con-sumers pay for. As a consequence of this perspective, the advertised regular pricebecomes a price of penalization, which is only paid by those who do not want towait, even a short period of time, for the often retailer sales. So, buying the salesdoes not imply an exceptional value, but it ensures the consumers that they havenot paid so much (Kauffman et al., 1994).

Hi-Lo Pricing Management

The successful planning and introduction of promotional pricing strategyrequires a detailed knowledge about the impact of changes in prices over the choi-ce of a brand. This knowledge may be got by means of the own and crossed elas-ticises of a brand (Krishnamurthi et al., 1994).

Hi-Lo pricing politics needs lots of data (local competitors prices), and a mana-gement system (local) to carry out a successful differentiation strategy, since prices

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have to be fixed locally. Nevertheless, the general image of prices has to be mana-ged in a central way. Fixing Hi-Lo prices is necessary if an establishment is deve-loping a product category with its own high quality brand since the managers willdesire to keep a high flexibility level in the price differentials. For instance, fixingrational brand products more expensive prices than private label, or using shortterm promotions to foster the use of the private label. This price strategy is moreflexible in a country, to cope with a wide range of competence. Moreover, high andlow prices are generally more compatible with a higher quality perception(Corstjens and Corstjens, 1996).

High and low pricing allows retailers to discriminate between informed andnon-informed consumers; in addition, retailers can attract consumers from otherchains with promotions to increase the traffic in the shop. While loyal consumersbuy the goods as when they are on sale as when they have high prices, price tem-porary discounts may involve the expansion of the category, when consumptionaverage is more flexible. Many retailers using high-low pricing think that tempo-rary and aggressive reductions in price help to hold up a low price image (Hoch,Dreze and Purk, 1994).

Temporary Price Discounts

In high-low pricing, promotions play an essential role. Price promotions aretemporary discounts over prices whose direct aim is to increase promoted pro-ducts’ sales and which may persecute other derivative effects that are not lessimportant, for instance, sales’ increasing of other related products, increase of con-sumers’ traffic, to transmit an image of the establishment of competitive prices(Cebollada and Mugica, 1997). There are different types of price promotions, themost used are the following (Walters and Mackenzie, 1988):

1) Losses Leaders: They are products which have a temporary cost price, or evenbelow it (although it is forbidden in some countries). They used to be announ-ced by means of big advertisement in leaflet and offered in special shelves.

2) Double Coupon: Retailers double the coupons’ value offered by the manu-facturers during a specific period of time with this practice.

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3) Prices’ Sales within the Shop: They are different from the others since thereductions in prices are less deep and they receive less support from themerchandising.

The competitive intensity is a characteristic of the markets, especially of theproducts which are most consumed. It has turned the sales promotion in one of theessential elements of the retailing marketing-mix and they represent more than ahalf of their promotion budget (Vazquez and de la Ballina, 1996). Besides, manu-facturers have also used trade sales and price reductions that they offer to theirretailing customers as a competitive tool in the market nowadays. In fact, tradesales costs have increased; they are even higher than advertising cost in manyindustries of packed products (Lal, Little and Villas-Boas, 1996).

The main goals of prices sales are to give out way to the products stocks, tocreate an image of the prices in the establishment, to attract customers (Fernandez,1993), to increase the sales, to encourage the knowledge of the promoted product,to promote to the proof of the product, to neutralize the actions of the competen-ce (Vazquez and de la Ballina, 1996), etc…

This sort of action is suggested when the price is an essential criterion in thedecision of purchasing, that is to say, when the a price elasticity is high. It impliesthe advantage of its simple and quick introduction, on the contrary, it can be imi-tated in an easy way by the competence, and it can end in price war, which isalways dangerous. A research carried out by Nielsen shows that in a 10% reduc-tion in the regular price of the product, the ones with more elasticity were: alco-holic drink, tuna, and diapers. The products with a more rigid elasticity were:female intimate protection and chocolate (Rodriguez, Otero and Rodriguez,1999).

Walters and Mackenzie (1988) researched the impact of the three main kindsof price promotions in the store traffic, promoted and non-promoted product salesand the profits, whose main results are the following:

• Most of loss leaders’ promotions did not have final effects over the storeprofits, neither the store traffic. Maybe these promotions encourage theloyalty increasing a low price image of the chain.

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• Double coupon promotions influenced on the promoted products’ sales,but not on the store traffic.

• Price promotions within the shop did not encourage promoted products’sales, or the store traffic. They can play a role to create a competitive priceimage.

• The expanded belief that promoted products encourage non-promoted pro-ducts’ sales is not supported in this research.

There are several ways to introduce a retailing price promotion, a reduction ofprices in absolute terms, in percentage term or a combination of both. Moreover adiscount can be offered to all the consumers or only to those who have the coupon.The coupon can be also directed to all the customers or only to a group of poten-tial consumers (Chen, Monroe and Lou, 1998). If the discount is big in relation tothe price, it is better to present it in an absolute way, if the quantity is not high, bet-ter in a relative form, and if both quantities are high, the best is to introduce dis-count using the both ways at the same time (Heath, Chatterjee and France, 1995).

The relative attractive of a price promotion does not depend only on the abso-lute financial quantity of the savings, but also on the level of the price of the pro-moted product. Two practices that have been used by retailers to introduce pricepromotions can spoil the credibility of the advertised savings: to increase the regu-lar price before promotion or to mask a permanent price reduction as a temporaryprice promotion. Both practices are not ethical and deceitful for the consumers.Price promotions will encourage the acquisition value of a product, so as the tran-saction value, if the sale price is below the internal reference price and price reduc-tion do not have a negative effect on the reference prices. Price promotions can failto encourage the utility of a product; if the reduced sale price implies a lower qua-lity of the product and that the consumers diminish its internal reference price.Coupons’ promotions are more effective than price discount in order to maintainthe general value of the promoted product and to reinforce its transaction value(Chen, Monroe and Lou, 1998).

If a price discount is not deep enough, consumers may not notice it. Price costsfurther than a certain level may not attract additional customers, as a consequen-ce of the lack of credibility, so that there would be less benefit for the retailer. The

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results of Abe’s research (1998) implies that the customers’ response to the sales’price has an “S” shape, showing the tendency and the effect of saturation suppor-ted by other researchers (Blattberg, Briesh and Fox, 1995).

Price discount may adopt two extreme forms: those that are frequent but notvery deep and those that are not frequent but very deep. Alba, Mela, Shimp andUrbany (1999) research studies the effects of these strategies on the consumers’estimation of the price levels for shops and competitive brands. Previous resear-ches have suggested that frequent and not very deep price discounts imply lowerprices’ perceptions. Nevertheless, this statement cannot be always generalizedbecause the contrary happens very often; deep discounts which are not frequentimply lower perceived prices (Alba et al., 1999).

The sales that consumers find in store are mainly those that manufactures offerto the retailer. We will call them trade discounts, and they are very important com-petitive tools for manufacturer. This is true although manufactures used to say thatthose trade discounts they offer to their customers are not productive for them;this is mainly because of the forward purchases that many retailers do when amanufacturer offers them a trade discount and they do not pass the price discountto the final consumer (Lal, Little and Villas-Boas, 1996). This forward purchasemakes reference to the fact that retailer usually take advantage of the temporaryprice discounts, buying and stocking an extra quantity, including them in theinventory for later sales. This idea is stated by Lal et al. (1996) taking into accountthat the increase of retailing sales related to the offer are lower that the quantitypurchased in promotion by the retailer.

3. EDLP strategyUsing of promotions done by retailers has had negative effects on manufacturers’brand. This has induced the manufacturers encourage the development of regularprices politics, like EDLP, which consists on the retailer engagement to keep priceslower than the average and regularly for all his products. Sales are divided regu-larly as along the time. This allows a best manufacturing and logistic planning,with lower costs for the manufacturer. So the manufacturer distributes a part ofthese savings to the dealer and the dealer to their customers.

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A difference between EDLP from Hi-Lo pricing is that in the EDLP strategy theconsumer’s attention is focused on good value of global purchasing (Lal and Rao,1997). EDLP establishments change the weekly high sales with deep discounts anda lot of merchandising in some products for lower prices in the most of the pro-ducts. In relation to trade discounts, an EDLP retailer may prefer long term dis-counts of wholesalers’ prices and regular transactions with the manufacturer thantemporary discounts and forward purchase. Nevertheless, the retailing needs tooffer any support inside the establishment to highlight the price reduction (Lal,Little and Villas-Boas, 1996).

Apart from the lower price of a purchase in a EDLP establishment, in contrastto a Hi-Lo pricing establishment, Lal and Rao (1997) show that the individualgoods prices have lower variance and, consequently, lower dispersion in EDLPchains.

A reason of the development of EDLP is the increasing amount of goods soldwith discounts and the increase of retailing regular price margins. This practice hasprovoked that some authors argue about the legitimate of these promotional acti-vities. Retailers worried about new regulations and the lack of credulity by theconsumers towards the Hi-Lo pricing are beginning to think about EDLP strategy.Ortmeyer, Quelch and Salmon (1991) declare that this strategy establishes initialprices at the same level or very near to the competitors’ sale prices, as to stimula-te the diary business as to administrate the most of products without sales. Someof the companies which are using in USA this strategy successfully, like Wal-Mart,Home Depot, and Toys R Us, in Spain: Mercadona, Dia, Lidl, are examples of it.The EDLP have rooted in some food establishment, grocery stores and specializedretailers. Nowadays is difficult find a kind of trade where some retailers do not usethis price strategy.

Retailers who only fix are price for all the products use this strategy too. Theprice of the most of their products is 1€, or there are some levels: 0.60€, 1€, 3€

… These retailers use an EDLP strategy because they offer low price productduring long time, without promotions. They offer minimal services to their custo-mers. These chains are directed to the customers’ segment with lower incomes.They provide an easy access to their stores which has a little selection of basic pro-

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ducts with excellent prices. They offer stationery, decoration, cleanness, beautyand cosmetics products. These shops apply the EDLP strategy and price alignmentstrategy. This shows that some strategies can be combined with others. It may bea market niche that has not been developed in Spain.

There are two basic reasons to develop an EDLP strategy:

1. The proliferation and abuse of promotions confuse the consumers wholoose confidence in that offer. The EDLP politic becomes a way to returnthe credibility.

2. Moreover, EDLP strategy can diminish the operation costs: lower stockingcost due to a more predictable demand and lower personnel costs.Advertising costs are also reduced since there are not frequent sales.

Vazquez and Trespalacios (1997) explain the main advantages the of EDLPstrategy: the reduced prices that can avoid a promotions’ war, and improve theinventory management can reduce the stocks; increasing the margin of profits sincealthough the prices are lower, the cost of continuous changes in prices are reducedand price errors charged to the consumers are avoided; consumers’ loyalty increa-ses because if the consumer believe in this strategy he will not expect to analyseother retailing promotions.

Of course, this pricing philosophy has some limitations (Vazquez andTrespalacios, 1997), to avoid them it is necessary to maintain the EDLP strategyand to allow the consumer compared prices and to appreciate the competitiveadvantage. This strategy is only valid if it is directed to price sensitive consumers.An excessive price emphasis can become a reduction of quality and service per-ception. The firm must develop a long term strategy due to the difficulty to con-vince the consumers in a short term.

Applicability of EDLP Strategy

For a company that has always used high low pricing it can be very difficult toturn into an EDLP company in a productive way. But many retailers do not adoptit because of different reasons; the main one is that EDLP practice does not allowdiscriminating prices selling the same products with different prices among consu-

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mers with different price sensitivity, among informed and non-informed consu-mers, among frequent and occasional consumers and among loyal and non-loyalconsumers. Other reason is that retailers think that promotions can help to createand keep an image of a low pricing establishment.

EDLP strategy is not possible for most of retailers. According to Ortmeyer,Quech and Salmon (1991) five are the variables that restrict the applicability ofEDLP strategy in relation to the assortment:

1) The proportion of product that can be easily compared. If the higher thecomparison facility the higher the credibility of the EDLP strategy.

2) The proportion of products that are frequently purchased. If frequency ofpurchase is higher consumers will have a better knowledge of the EDLP.

3) The price of the goods, the higher the proportion of low price products, thehigher the possibility for consumers to assess the convenience of buying fre-quently an EDLP establishment.

4) The percentage of the goods which is sensitive to the fashion. If its quan-tity is high there will be fewer possibilities for introducing this strategy suc-cessfully, since last season, damage goods and mistakes of fashion cannotbe sold but with deep sales.

5) Retailers offer a complete assortment within the categories. If this happens,it is easier to introduce the EDLP strategy, because retailers who do notoffer a complete assortment can obtain many advantages by buying pro-ducts on sales, so they can fix deep discounts to their consumers.

Grocery stores were the first becoming EDLP successfully. Their early and suc-cessful adoption is related to the high proportion of national brand from frequentlypurchase categories. Due to the good knowledge their consumers have about thegoods they can assess the goodness of the prices quickly. Moreover, the frequency ofthe visits to these establishments encourage to time sensitive consumers to buy regu-lar in EDLP establishments. For these clients, purchasing once is better than lookingin leaflet and newspapers and visiting several shops to get the best available prices.

EDLP strategies are more suitable when the company has a structure of costswhich are prepared to maintain this competitive advantage on price leadership and

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when exists a stable based of loyal consumers, who do not change of chain storewhen there are sales in other ones. In the practice, it is very difficult to find com-panies with a strict EDLP policy since all retailers’ promotions. It is also true thatthere are many hybrids so that, EDLP politicy should be seen as a continuum(Cebollada and Mugica, 1997; Hoch, Drèze and Purk, 1994).

To get that EDLP strategy provokes a substantial increase in the sales volume,an image of low prices must be created in the consumers’ mind. A change in theprice image is necessary to induce some consumers to change of store. It is easy toimagine that a price reduction without an advertising support must not be enoughto change price image, at least in a short term (Hoch, Drèze and Purk, 1994).

EDLP Consumers’ Profile

It is tested that consumers who buy great baskets of purchase acquire manyproducts categories and buy a high percentage of their food needs in a single visit.It implies that they are captive of the price of a great deal of product categoriesand they have less flexibility to get sales. These buyers could prefer buying inEDLP chains due to the lower price expected for the basket of purchase. Small bas-ket of purchase buyers can take advantage of price variation of the store, theydivide the total consumption in small shopping buying more products categorieswhen prices are low and delay their shopping when they are higher. Thus theywould prefer EDLP chains (Bell and Lattin, 1998; Russell and Petersen, 2000).Great basket of purchase buyers are relatively price inelastic when deciding thecategory and price elastic when deciding the establishment this idea may shown inthe following matrix:

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In the same research Bell and Lattin (1998) highlighted that small basket pur-chase buyers are older with less incomes and smaller families than big basket pur-chase buyers. A price sensitive consumer will probably choose a EDLP chain betterthan a Hi-Lo chain, because they can have a relative certainty that they will findlower prices. For a basket purchase buyer the present price of a product in an EDLPestablishment may be higher that its price in a Hi-Lo pricing store in a concrete week,the real price of a basket of purchase will be probably lower in EDLP chain than inHi-Lo store. Moreover, if we assess the search cost of the lowest price for each arti-cle of the purchase basket. It is possible that EDLP stores attract consumers withhigh sensibility to regular prices. On the contrary, Hi-Lo chains attract consumersmore sensitive to discount prices than changes on regular prices. Despite that, wemust emphasize that EDLP establishment also offer promotions, such us: price spe-cial discount, special location of goods, etc (Shankar and Krishnamurthi, 1996).

Bell, Ho and Tang (1998) research shows that bigger younger and with lessincomes families prefer EDLP outlets. A 79% of households of their survey visitone or two establishments. Taking into account a threshold size of the basket ofpurchase we can determine which are the stores that have a better market positionwith regard to the different segment of consumers.

A research carried out by Rodriguez, Suarez and Garcia (1997) studies the pro-file of the consumers of discount stores in Cantabria (Dia, Lidl and Tifer, in 15 dif-ferent chains in 1996). The results are:

• An 83% were women, and 62% were housewives.• Most of this chain’s clients have enough time to buy. These can be demons-

trated in that research since housewives, pensioners, unemployed, and stu-dent summarize the 72% consumers.

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Type of ConsumerDecision Choice

Category Establishment

Small Shopping Elastic Inelastic

Big Shopping Inelastic Elastic

Table 2. Decision choice in relation to the type of consumer

Source: Bell and Lattin (1998).



• The largest age is from 35 to 54 years old.• Regarding to the family incomes, 32.6% of households declared to have a

monthly income from 900 to 1800 euros, only 4.8% affirmed to have anincome below 450euros.

• The main reasons to choose discount stores were: reduced prices (79.9%)and nearness (11%).

• There exist differences between consumers’ behaviour depending on if thestores are urban or peripheral.

This profile of discount store’s clients which use EDLP, contrast with the ideasome authors have about them, so Gomez (1996) states that this sort of consumeris very price sensitive is not brand loyal and most of them have a low purchasingpower. The society evolution shows that spending on grocery may diminish in thefamilies became they will dedicate more time to inversion, future incomes and lei-sure activities. The consumer is increasingly informed each day, population ismore sensitive to nondurable goals’ prices, because retailers encourage them tocompare prices and sales. Consumers find great differences in prices between lea-der brands and private labels, so they became sceptic when paying more for theformer.

Other way to classify the consumer is that one used by Kim and Park (1997),by means of two groups: routine and random.

a) Routine: They visit the stores regularly they used to be consumers with nomuch free time, a full time job, a high socio-cultural level and it is frequentthey have children under six. Those household have high opportunity costwhose days to buy are not flexible, they have higher incomes and lessmonetary budget. They spend more time from shopping to shopping, spendmore money in each purchase and are more chains’ loyal. It is more likelythey buy in small shops or in EDLP chains.

b) Random: They visit establishments of frequently purchase products notregularly. These are opportunists. They look for the best price for the pro-ducts they buy between different chains. These consumers can prefer Hi-Lopricing establishments.

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4. Goals and hypothesisThis research is aimed at the study, description and comparison between EDLP

and Hi-Lo pricing strategies, to help managers to decide which strategy is better;regarding to their costs, their customers and their competitors; so as to help con-sumers to know both strategies, so that it is easier for them to choose the retailingstrategy they prefer.

We cannot forget that consumer is an essential topic for any kind of company.There exist different points of view related to the profile of the kind of chainswhich use EDLP versus Hi-Lo pricing. Thus it is which supposed that EDLPattract households with less time to buy: where husband and wife work, so theyuse to have high or medium incomes, they are younger and they have limited freetime. This idea contrasts with the study made by Rodriguez, Suarez and García(1997) where consumers with less time restriction are the higher percentage ofdiscount store’s clients. Beside, households who are mainly attracted by Hi-Loprices establishment are sales hunters; they are older, only one works, they havemore time to buy and less purchasing power (Ortmeyer, Quelch and Salmon,1991). Nevertheless, others authors as Lal and Rao (1997) state that all esta-blishments look for both groups of customers, highlighting several variables ofmarketing. Other authors as Yadav and Seiders (1998) insist on the consumers’experience, so that expert consumers will visit EDLP stores, while non-experien-ced ones will be the aim of promotions and will visit to Hi-Lo pricing establish-ments. It is interesting and thus, another goal of the research, to study the con-sumers’ profile of chains which work on each strategy and analyze differencesand similarities.

From the revised literature, after analysing the researches, comments and futu-res research and the mentioned goals, we can state the following hypothesis:

Hypothesis 1: EDLP establishments’ consumers obtain lower prices than Hi-

Lo price consumers in every product category that has been analyzed.

Hypothesis 2: EDLP consumers get less price promotions and experience a

lower promotional activity than the chains which use Hi-Lo prices in every

product analyzed category.

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Both hypothesis emerge to differentiate Hi-Lo pricing and EDLP, according toauthors like Lal and Rao (1997); Ortmeyer, Quelch and Salmon (1991); Hoch,Drèze and Purk (1994); EDLP establishments are characterized by having lowerprices, and a less amount of promotions, thus, the total value of a basket of pur-chase usually is lower than in establishments which work on other price strategies.According to Corstjens and Corstjens (1996); Hoch, Drèze and Purk (1994) Hi-Lopricing strategies are based on medium or high prices for a great deal of products,but with frequent and deep price promotions for a specific products and which canbe compared easily. Consequently, price sales are very important in this strategy,as Cebollada and Mugica (1997) or Mulhern and Padgett (1995).

Although these aspects are widely accepted by the authors, there are no manyresearches which study these foundations, that is to say, which compare products’prices, so as, that frequency and depth of promotions between establishment thatuse both pricing policies, at least in Spain. This is a goal of our research and it isa base of both proposed hypothesis.

5. MethodologyTo achieve our goals and to contrast the hypothesis we have used the hierarchicalmultinomial logit model. This model econometric belongs to the multinomial logitmodels’ family, which is within the discrete choice models; whose fundamentalbase is the utility maximization Theory.

The variables we have analysed in the model are the following: as an indepen-dent variable “elecmar”, which shows the chosen brand each time between the fivegiven in the choice set. The dependent variables used are:

• Loyalty: It is a variable built up for each chosen consumer on the panelduring the initiation period. We have realized a market share for each ofthe five analysed brands for each panellist studied, to according to Bell andBucklin (1999). The reason of this choice to calculate the brand loyalty isits simplicity and being endorsed by these authors.

• Socio-demographical Variables: Age of the housewife, social status, mem-bers of the family, and children.

• Units: Purchased products units

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• Sales: A dichotomy variable that is 1 if the purchased product had at least15% discount regarding its general price, and 0 in other case.

• Price: Price paid for the product.• Reference Price: One of the difficult decisions that have been taken in this

research is to decide the way to measure the reference prices. We have follo-wed Bell and Lattin (2000) research since it is one of the most recent ones,but we have also based this study on previous researches and Briesch et al.(1997) because it is a rigorous research. According to the authors is not con-venient to specify only one reference price for every brand, thus the referen-ce price must be specific for each brand. This idea seems to be the mostaccepted in literature. We have built up the reference price like the last pricethat a consumer paid when bought the brand within last time the analyzedperiod. The reference price is the one that the product had in that moment.

• One: Parameter used by Limdep 7.0 to build up a specific constant for eachchoice alternative, in this case for each brand, and it measures the effectsthat have not been taken into account in the model.

Data

The company Taylor Nelson Sofres provide us a consumer panel data calledMaster-TNS panel. The data about the products are three: Milk (with 70588 regis-ters), Mayonnaise (12046 registers) and liquid detergent to wash dishes (5014registers). All the purchases of the panel data have been studied per week from1998 to 1999 (80 weeks) in the Nielsen III area (South), it is formed by all theandalusian provinces and Badajoz.

We have had to transform and to reduce the data to apply the multinomiallogit model. First of all we had reduced the number of brands in order not to com-plicate the reach of results. We have had an important choosing the five brandsthat have been most sold. We had do an important restriction which was to sup-pose that all panellists had access to the same choice set, the five most sold brands,although this not very realistic according to Briesch et al. (1997), Erdem (1996),Kim et al. (1999), we decided to choose these five brands. In the following Tablewe offer the brands and their market share.

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The next step is to select the panellists we are going to use. It is a complex ques-tion, because does not exist an agreement about that matter, in the numerous lite-rature available (Bell and Lattin, 2000; Bell and Bucklin, 1999; Bell, Bucklin andSismeiro, 2000; Russell and Petersen, 2000; Popkowski et al., 2000; Guadagni andLittle, 1983 and 1998; Kim et al., 1999; etc.). There is not a clear methodology todo this selection, the model and the variables to use: loyalty, price reference,periods … are going to have a great influence on it.

As Sivakumar and Raj (1997) state, the panel is divided into two parts for eachgroup; an initiation period that is used to fix the initial value of variables as loyaltyand price of reference, and an estimation period, where the parameters are esti-mated. The 30 first weeks belong to the initiation period and the others 50 belongto the estimated period. Once the split up is made, we have selected the families

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Brand Market Share1

Detergent to wash dishes

FAIRY 14,8%X2 11,8%

CORAL 11,4%DIA 10,2%

AROS 9,7%TOTAL 57,9%

Mayonnaise

CALVÉ 20%YBARRA 18,7%

CALVÉ-LIGERESA 10,6%KRAFT 7,6%

DIA CRISTAL 7,3%TOTAL 64,2%

Milk

PULEVA 12,4%DIA 10,9%

COVAP 7,5%RAM 7,2%

C.L. ASTURIANA 5,9%TOTAL 43,9%

Table 3. Market share of the brands

Source: Own elaboration.

(1) Market Share of the

Brand on the panel.

(2) We do not know the

brand name.



which have affected two purchases in the initiation period and two purchases inthe estimation period. Thus we ensure a minimal number of purchases for eachperiod. It allows us to obtain as the initial variables in the initial period as theparameters in the estimation period of the models. So the group of purchase regis-ters we had at first in the panel, after applying the mentioned reduction, we analy-sed the following:

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PRODUCT INTIAL PERIOD ESTIMATION PERIOD

Detergent to wash dishes 1766 2496

Milk 8530 12611

Mayonnaise 1731 2507

Table 4. Purchasing register analysed with Table 4. the hierarchical multinomial logit

6. ResultsLet’s start showing the validity of the model and the coefficients’ estimation.

Detergent to wash dishes Milk Mayonnaise

Number of Observations 12480 63055 12535

Completed Iterations 2 51 65

Log Likelihood Function. -2341.373 -9907.995 -1682.889

Log Likelihood Restricted. -4513.774 -21571.43 -4838.860

Chi-Square 4344.804 23326.88 6311.944D.F. 15 15 15Significance .0000000 .0000000 .0000000

Rho2 .48128 .54069 .65221Rho2 Adjusted .48050 .54055 .65169

Table 5. Validity of the models for the three product categories



From these results the good predictable validity of the models can be deduced,since with Rho2 coefficients (also known as U2 or pseudo R2 in logit models litera-ture) between 0.48 and 0.65 for three categories, let us see that good results havebeen obtained, became it is very difficult to find values over 0.7 (Sivakumar andRaj, 1997; Bell and Bucklin, 1999; Bell and Lattin, 2000; Vázquez, Santos andDíaz, 1998; Suárez, Rodríguez and Trespalacios, 2000). This quantity provides ameasure of the uncertainty explained by the model, its value varies from 0 to 1. Ifthe tested model is not better than reference model U2=0 and if it is a perfect pre-dictor of the choice U2=1 (Guadagni and Little, 1998), although in the revised lite-rature values over 0.75 have been rarely found. Moreover, the statistic contrast isestimated by means of the expression: 2[L(β)-L(c)], that is distributed as a chi-square, whose degree freedom levels are the coefficients difference between themodel in question and which only specify the constant. Due to this statistic is sig-nificant at a p<0.01 level in the three cases, the measures of goodness of fit repre-sent a significant increase in relation to the model which only specifies constant,so we can state that the models for the three product categories are good, impro-ving the hierarchical multinomial logit model to the general multinomial logit.

The model predicts successfully a 54.85% of the realized choices by the con-sumers in the selection of detergent to wash dishes. These percentage increasesalmost 30 point if we look at the choice of the retailer according to its price stra-tegy. This is obvious, since we reduce the possibilities of choice from 5 to 2. Thus,we get successful results for this product category. The estimations for the mayon-naise are quite good, since we obtain a percentage of good choice of 66.34%, andan almost perfect value of 99.6% for the retailing chain. It creates an idea of good-ness of the estimated model. In relation to the milk the model shows a high per-centage of right choices, 68.86% for brands individually, and 86.76% for a chainwith EDLP and Hi-Lo pricing. Next we provide the estimated coefficients.

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After analysing coefficients in Table 6, we can affirm that the most influentialvariable is loyalty, since it has the highest absolute value and it always results sig-nificant different from 0. Moreover, the positive sign shows that the higher theloyalty, the higher the utility or purchasing probability of the three product cate-gories.

Regarding to the socio-demographical variables, they generally have very littleinfluence on the utility function of the different brands, their sign so as their valuediffer from the categories of product, but as they are not different from 0 we cansay that they do not have very much influence on the probability of purchasing.

In relation to variable sales, it has a strange behaviour regarding to the cate-gory we study, so in the detergent to wash dishes it has an almost inestimable abso-lute value, very near to cero. In the category of milk, it has a high and positivevalue, 11.0115. Consequently, price sales have a strong and positive influence inthe utility given to the purchasing of a brand of detergent to wash dishes.Nevertheless, it has a negative sign and a high absolute value, -11.0557, in thecategory of mayonnaise. It shows that having a discount under 15% it is harmfulfor a mayonnaise brand, taking in mind its utility function. Next we find the price,the core of this research, and we can state that its influence to the probability ofbuy a brand is essential for each category of the product, since in every case eitherthe paid price or the reference price are different from 0, although its importance

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Detergent to wash dishes Milk Mayonnaise

LOYALTY 2.973880294** 3.295175306** 2.991224155**AGE -0.7927986396 -0.05160880940 0.2504227088

STATUS -0.9096233968 0.5145864947 0.6288863231NUM_PER -0.7538570538 0.4063064764 0.7810305041CHILDREN 1.819246794 -0.3294362496 -0.8301457901

UNIT 0.4902281074E-13 0.08744816075 -0.3330820171SALES 0.1213597070E-13 11.01154313 -11.05572552PRICE 0.003973439130** -0.01249452979** -0.001382363284

REF_PRICE -0.008443205449** -0.01673359232** -0.0001944146850

** Coefficients different from 0, with a signification level of 99%.* Coefficients different from 0, with a signification level of 95%.

Table 6. Estimated Coefficients of the Hierarchical Logit



is lower than the loyalty, which has a higher absolute value. It confirms the resultsof other researches. The price plays a very important role over the consumers’ pur-chasing behaviour. Having in mind the detergent to wash dishes, there is a positi-ve sign in the price showing that a higher price implies a higher utility of the brand,it seems to be contrary to the economic laws, but it is no so strange if we remem-ber that the leader brand is Fairy, which has a price that is three times the price ofits competitors. As a consequence, price seems to have a contrary effect that is tosay, the high the price the lower the purchasing. On the other two categories, it hasthe sign it was expected, meaning that the higher the price, the lower the purcha-sing probability.

Regarding to the reference prices, they were supposed to have a negative sign,since higher reference prices for a brand can get that its purchasing probabilitydecreases, since it should point out that brand is expensive for the consumer, whatit is demonstrated in the results. Next, we offer the estimators of the coefficientsof the inclusive values.

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Detergents to wash dishes Milk Mayonnaise

EDLP 1.000005113** 1.260882401** 1.217947785***Hi-Lo 0.9999984680** 1.030408112** 0.08187994090

*** Coefficients different from 0, with a signification level of 90%.** Coefficients different from 0, with a signification level of 99%.

Table 7. Estimated Coefficients of the Inclusive Values

The results of the estimation of a logit model are conditioned by the assump-tions related to the decision structure which the individual follows, that is, theshape of the decision tree has. Thus, we have to explain to prior the decisionstructure of the model (Suarez et al., 2000). In our case, when trying to compareEDLP chains with Hi-Lo pricing establishment, we have very little choice becau-se only the brand DIA, with an obvious EDLP policy, had an important quantityof purchases in the panel; regarding to the other four brands which conform theHi-Lo pricing, we cannot ensure that they all are sold in Hi-Lo pricing establish-ments.



The coefficient of inclusive value must be between 0 and 1. This coefficient isan index which shows the impact of the marketing variables move from onebranch of the decision tree to the following one, due to that the hierarchical logitframe implies that the alternatives within a branch are more similar tan otheralternatives in other branch (Sivakumar and Raj, 1997). And the inclusive valueknown as accessibility, gives a global idea of the attractive of a set of alternatives(which belong to the same range), for the consumers, as the better alternative (Belland Bucklin, 1999; Larrañeta et al., 1997). As we can see in Table 7, we do notobtain very good results for these parameters since most of them are over 1, orvery near, but we can state that the coefficient related to EDLP range in higher thanthe same one for the Hi-Lo pricing branch, in the three product categories analy-sed, it parts out that the utility that consumers give to EDLP is higher that theygive to Hi-Lo pricing, this is a very interesting and innovative result from the pointof view of consumer purchasing behaviour knowledge toward frequently purcha-sed products.

One of our goals was to obtain a profile of loyal consumer to EDLP chains,and other for Hi-Lo pricing stores. The Table 8 shows the coefficients to analysethese profiles.

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Taking the Table as a starting point, we can comment aspects such as Dia’sconsumer which belongs to EDLP chain, are more brand loyal, and are a bit older,

EDLP Hi-Lo

LOYALTY 0.6793 0.6403AGE 2.22 2.1705STATUS 2.5396 2.759NUM_PER 2.9843 2.708CHILDREN 1.8953 1.855UNIT 3.2186 3.077SALES 0.133 0.4104PRICE 129.4223 208.463REF_PRICE 129.178 208.446

Table 8. Consumers Profiles of EDLP vs. Hi-Lo Pricing Establishments



they have a higher social status, more people at home, they buy more units, theyhave less price discounts and they pay a cheaper price than the consumers of Hi-Lo chains.

Going on with the analysis of the consumers differences related to the chainswhere they go. First of all, using the statistical software SPSS 10.0, applying test t-Student, we find out the differences on brand loyalty, units bought and prices paidand reference prices among the consumers of both sorts of chains.

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Choice of Retailing N Mean Typical Standard ErrorDeviation of Mean

LOYALTY EDLP 4114 0,74062 0,35636 5,5560E-03

Hi-Lo 13500 0,66144 0,36870 3,1733E-03

UNIT EDLP 4114 6,07 5,53 8,62E-02

Hi-Lo 13500 5,05 5,15 4,43E-02

PRICE EDLP 4114 82,83 39,16 0,61

Hi-Lo 13500 153,13 117,74 1,01

Table 9. Statistics Grouped for Continuum Variables

Starting from the information above, we can conclude that Dia’s consumersare more brand loyal, they also buy more units of products, 6.07. It also exists adifference in prices they paid because they are cheaper, as the theory states. Tocheck if these differences are significant statistically, we apply the test t-Student.So that it is checked that there significant differences between paid prices(F=2940.144 and p=0.000), purchased units (F=9.86 and p=0.002), brand loyalty(F=37.428 and p=0.000), and also among consumers who go to Dia’s chain oppo-site the consumers who go other retailers. But as the analysed variables did notfulfil the normality requirement, we have made use of non-parametrical test, U ofMann-Whitney and Kolmogorov-Smirnov, to ensure that the result are trust-worthy, confirming the results we mentioned before about significant differencesfor the three studied variables regarding to the consumers who go to EDLP or Hi-Lo chains.



7. Conclusions, limitations and future researchesAn important finding of our research is to differentiate between the profile of con-sumers who prefer buying in EDLP establishment and Hi-Lo chains’ consumers.Our results allow us to contrast the proposed hypothesis.

EDLP customers (Dia) are more brand loyal and buy more products than high-low customers. That result agrees with others researches (Bell and Lattin, 1998;Russell and Petersen, 2000).

EDLP consumers are a bit older and have a higher social status than Hi-Lo cus-tomers. This result is related to the idea that the families with more limited timeand higher purchasing power use to buy in EDLP retailing. This result is alsoremarked by Bell and Lattin (1998).

Families of EDLP customers have more members than Hi-Lo ones, which isaccording to Bell, Ho and Tang (1998) and Bell and Lattin (1998).

In relation to the number of children, there are not differences between bothstrategies.

EDLP consumers get less price discounts than Hi-Low customer. Moreover,the purchases done in EDLP chains have a lower price than Hi-Lo pricing esta-blishment. The results stated above answer to the two hypotheses proposed inour research. The results confirms that the customers who prefers EDLP retai-lers cope with average lower prices and less price discounts than Hi-Lo custo-mers, for the three product categories we have analyzed. So we confirm bothhypotheses.

The main limitation we have found out is to suppose that a brand of a retai-ler (Dia) which sells other brands is the only representative of this chain. Wealso suppose the other brands to be representative of the Hi-Lo chains. Thisassumption has emerged from the difficult to obtain a consumer panel datawhich divides the shopping carried out in discount stores from other supermar-kets’ outlets.

Other limitation is related to hierarchical multinomial logit model. We havesupposed that the entire analysed panellist had access to the five studied brands.And this could not be true for some panel members who usually go to stores wheresome of the brands are not available.

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We have assumed a structure of decision tree, dividing the alternatives into twochoices: EDLP (Dia) and Hi-Lo. That may not be the most suitable in relation tothe coefficients of inclusive values which were a bit higher than 1.

Regarding to future researches a very important aspect is to compare the glo-bal profits and the category profit which are provided by both strategies. We wantto make reference to the potential of the discrete choice models to help the resear-chers to know in a deeper way the multiple choices that a consumer carries outwhen shopping, choosing an establishment, a brand, a product category, quantity,discount prices, etc… They are a very good frame to use the discrete choice modelsthat have already been used in our area. Due to the development of the capacityof computers and the improvement of the models very significant advances can begot in the knowledge of the consumer behaviours.

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