Correction: The original version of this article incorrectly stated that the study discussed found “everyday pricing” in supermarkets more effective than “promotional pricing,” when in fact the opposite finding was reported in a study by Stanford Graduate School of Business marketing professor Harikesh S. Nair and professors Paul B. Ellickson and Sanjog Misra, both of the University of Rochester.
A recent study found that “everyday pricing,” defined as consistently low prices across all products, is in fact less effective than “promotional pricing,” defined as temporary discounts, in supermarkets.
The study, entitled “Supermarket Pricing Strategies,” was co-authored by Stanford Graduate School of Business marketing professor Harikesh S. Nair as well as professors Paul B. Ellickson and Sanjog Misra, both of the University of Rochester.
The researchers used game theory to analyze the Trade Dimension’s “Supermarkets Plus Database,” which provides information on every supermarket in the United States from 1998 to 2000. A supermarket is defined by the report as “a store selling a full line of food products and generating at least $2 million in yearly revenues,” and includes large chains such as Safeway, Wal-Mart and Kroger.
Common market and economics theory predicts that supermarkets use pricing strategies as key marketing tools as they compete for local customers. These approaches can be labeled as offering everyday low pricing, promotional pricing or a hybrid model.
Some chains consistently reported either promotional or everyday low pricing; 73 percent of Wal-Mart stores, for example, said that they endorsed the everyday-low-pricing strategy, while only 5 percent of Safeway stores did the same. Instead, Safeway tended toward promotional pricing.
The report explained that supermarkets tend to choose “associative matching, which usually occurs in settings with…complementarities.” Thus, “firms are able to increase the overall level of demand by matching their rivals’ strategies.”
The report argued that the associative pricing may be explained in that customers are more likely to trust retailers when they cooperate and offer similar strategies to their rivals, rather than trying to differentiate themselves.
“Consumers prefer to receive a consistent message,” the report explained.
The research also found that certain pricing strategies align better with certain demographics.
Everyday low pricing “is the preferred strategy for geographic markets that have larger households, more racial diversity in terms of African-American and Hispanic populations, lower income and fewer vehicles per household” while promotional pricing “is associated with smaller households, higher income, fewer automobiles per capita and less racial diversity,” the study reported.
Progressive in its methodological methods and data set, the report said, “incorporating such postgame outcome data into the analysis promises to offer newer and crisper insights into the nature of competition in the market.”