Everyday Low Prices and High-low are two popular pricing strategies used in retail. How to recognize which one a particular shop follows? Which one can bring better results? How to make sure the chosen strategy is implemented successfully? Check our article to understand the differences between the EDLP and HL strategies!
Pricing strategies in retail
In general, pricing strategies in retail are usually focused on the two objectives:
- Maximizing margins,
- Maximizing the revenue.
Typically, lower margins result in higher revenue – the lower the prices, the higher the demand. The companies that use the low-price position try to trigger the purchases by low prices – you can easily identify them by looking at the advertisements that are usually focused on price. Their margin is relatively low but thanks to the economies of scale, their profits are really decent. In e-commerce, these are the webshops that you can find on the top of listings on price comparison websites.
The strategy that stores with a high-price position follow is quite different. They sell products at higher prices but offer additional value via additional services and an extraordinary customer journey. It can be well-trained customer service, attractive delivery terms, or an intuitive design of an online store. The number of orders at such stores might be lower but it is compensated by higher margins.
Everyday Low Prices vs High-Low pricing strategies
So what is the difference between EDLP and HL strategies and what does it have to do with low-price position and high-price position?
You can think of the Everyday Low Prices strategy as a low-price position with no deeper promotions. If you go to a store that follows this strategy, the average product you pick from the shelf will probably be well-priced. However, you will rarely see sales as “-70%”. Why? Because the base prices are already quite low, so there is no big room for spectacular sales.
On the other hand, the High low strategy means that the average product in the store is probably more expensive than the average on the market but you can find some extraordinary promotions. That’s because there are always a few products that are sold significantly below the average product price. These are the so-called traffic generators – advertised products, sometimes even loss leaders, that are on temporary offers. The assumption is that the customers, attracted by the discounted product, will visit the store and make the purchase. But it shouldn’t be only this one product then – the customers usually add more products to the cart. Including those that are sold with significantly higher margins.
Pricing strategies – challenges in online retail
The EDLP and HL pricing strategies are known from traditional retail – however, they can be used in online retail as well. E-commerce gives some new challenges, though.
First of all, prices in e-commerce are extremely transparent. Customers can easily track the prices using price comparison websites and marketplaces, such as Idealo or Amazon. That’s why it’s very easy for them to find the products that are sold at good prices. It means that:
- The offers of stores following the EDLP strategy can be found easily. Customers can get used to the image of such a shop as a “cheap one” after seeing its offer in several listings;
- Customers can quickly find the discounted products that webshops following the HL strategy sell. It seems to be a good thing but there is one drawback as well: customers can quickly realize that it is the only product sold at a good price. Once they do, they can resign from buying anything more. That’s why using loss leaders in the HL strategy can be a risky move.
You should also remember that prices are more relevant in e-commerce than in traditional retail. It’s more difficult to attract customers by great store design – it isn’t as important as in the case of a physical store. That’s why, when making the next purchase, the customer won’t necessarily visit the website they purchased at the last time, but will probably look for the best offer again.
And thirdly, the empirical research (link) shows that the EDLP strategy is, on average, more profitable. That’s mostly because customers value the “good price certainty” in the trusted shops.
How to use price monitoring to implement HL or EDLP pricing strategy?
Given the transparency of the prices in e-commerce, successful implementation of the HL and EDLP demands regular price monitoring.
How to make the best of a price monitoring tool in the two strategies?
If the store follows the EDLP pricing strategy, it should monitor the positioning of the shop against the competitors for each of the products. That’s because, to build the loyalty of customers, you should make sure your prices aren’t significantly above the competition.
How to use the tool in the case of the HL strategy? The key to the success of this strategy is the attractiveness of the temporary offers. That’s why we suggest making sure the products that are used as traffic generators are really sold below the market prices. In the price monitoring tool, you can focus on the promoted products by creating customized product tags – e.g. “Weekly promotion”. Thanks to that, you can filter the results to see only competitor price changes for these products and or set email alerts to be notified every time the position of your offer (e.g. on Google Shopping) deteriorates. You can use dynamic pricing as well to change the prices automatically.
You can read about this use case in our free ebook as well: