Shoppers Care About More Than Price at the Supermarket

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. 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 Ram Rao of the University of Texas, Lal discovered that both types of stores actually benefited from the other's strategy. They found that consumer choices were based on more than just price. Promotional stores offered a higher service level, such as longer hours and a greater assortment of goods, as desired by busy consumers. Says Lal: "Look at Safeway in the last several years. They've emphasized the deli, better produce, wine selection, and flowers. When you check out they say, 'Thank you, Mr. or Mrs. so-and-so' and carry the groceries to your car." Safeway, a "hi-lo" store using a promo-tional 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 pressed for time 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 convenient locations and lower basket prices, which obviate the need to search for deals. Moreover, it has a lower service level, such as no carry-out 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 use advertising very effectively to communicate the comparatively low cost of a total basket of goods at their stores.
       Lal and Rao concluded that--in contrast to the traditional view of segmentation, in which different items in a product line are designed to appeal to different market segments--both types of stores had actually developed multidimensional 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 forgo 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, but in two different ways. The result is that both stores can make more money than they would if they both attacked these 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

"Supermarket Competition: The Case of Every-Day Low Pricing," Rajiv Lal and Ram Rao, GSB Research Paper #1420, October 1996

The researchers discovered that both types of stores actually benefited from the other's strategy.