A view of the industry through the
eyes of a chain buyer.
What's the Best Pricing Strategy?
A new study reveals retailers can
increase profits by changing pricing strategies.
by Staff Report (January 18, 201009)
According to a press release from the University of Miami, new
research from the university's School of Business Administration
shows retailers can substantially increase sales and profits if they
increase the price of a sale item to its original cost in gradual
steps, rather than in one swift move. A 30-week field study showed a
200% increase in sales and a 55% increase in profits by using this
strategy, coined "Steadily Decreasing Discounting," or
"SDD" by the researchers.
SDD was tested against two commonly used pricing strategies,
Everyday Low Pricing (EDLP) and Hi-Lo Pricing. EDLP, used by
discount stores such as Wal-Mart, consistently features items at low
prices that are seldom on sale. Hi-Lo pricing occurs when stores
offer significant discounts on selected items for a limited time
"SDD starts like Hi-Lo pricing in that you have a big sale,
but the main difference comes after the initial sale when you
progressively increase the price back to its regular level versus in
one shot," says Michael Tsiros, an associate professor and
chair of the Marketing Department at the University of Miami School
of Business and the study's lead author. "By doing so, SDD
avoids a key problem of the Hi-Lo strategy – the big dive in sales
at the end of the promotion that results from people stocking up on
the item during the promotion or because they perceive the price to
be too high because it was recently much lower," added Tsiros,
who conducted the research with David M. Hardesty of the University
The research found that SDD is more effective than EDLP and Hi-Lo
pricing for two primary reasons. First, consumers not only consider
past prices, they also forecast what prices will be in the future.
So when buyers see a trend of increasing prices, they forecast
higher future prices and are more apt to make a purchase today.
Second, buyers have been shown to anticipate feeling regret after
they miss a sale. So if they expect prices to increase, then they
are more likely to make a purchase to avoid the feeling of regret in
the future. If they fail to make that purchase during a sale and see
a large price increase – from $50 to $100, for example –
consumers might delay their purchase. With the incremental approach
of SDD – from $50 to $60 to $70, and so on – the price increase
is comparatively less significant, and the consumer is more likely
to buy immediately, even after having missed the initial sale.
The research included both lab and field studies. One field study
took place in an upscale kitchen appliance store that sold wine
bottle stoppers for $24.95. The store alternated between SDD and
Hi-Lo pricing every week for 30 weeks, with the average price held
constant between the two approaches.
SDD pricing was 30% off the first day, 20% off the second day,
and 10% off the third day. Hi-Lo pricing was implemented in two
ways. The first was the "same depth" as the SDD approach:
30% off for two days. The second was the "same frequency"
as SDD: three days at 20% off.
The result? When compared to selling the wine stoppers at the
regular price, same-depth Hi-Lo pricing increased sales by 63% and
same-frequency Hi-Lo increased sales by 75%. But SDD boosted sales
by 200%. When it came to margins, same-depth Hi-Lo increased profits
by 5%, while same-frequency Hi-Lo actually decreased profits by 12%.
SDD drove a 55% profit increase.
"SDD could be particularly effective in the current economic
downturn," says Tsiros. "Many retailers have been offering
discounts of 60% or even 80%, and stores can't offer those prices
forever. But if they bring prices back up in increments, consumers
will have time to adjust. Likewise, SDD could have implications for
the holiday shopping season because American consumers expect big
sales after Thanksgiving – and often delay purchases after the
sales end. But with SDD, buyers may decide to purchase now, while
the price is still relatively low. That's a prospect that could
please consumers and retailers alike."