EDLP (Everyday Low Pricing) - Corporate Finance Institute

EDLP is a pricing strategy in which a company charges a consistently low price over a long-time horizon. · For the consumer, EDLP simplifies decision making and ... EDLP"EveryDayLowPrices"Home›Resources›Knowledge›Economics›EDLPWhatisEDLP?EDLP,whichstandsforEveryDayLowPrices,isapricingstrategyMarkupMarkupreferstothedifferencebetweenthesellingpriceofagoodorserviceanditscost.Itisexpressedasapercentageabovethecost.inwhichfirmspromiseconsumersconsistentlylowpricesonproductswithouthavingtowaitforsalesevents.Insuchapricingstrategy,afirmsetsalowpriceandmaintainsitoveralongtime-horizon(giventhatproductcostsCostofGoodsSold(COGS)CostofGoodsSold(COGS)measuresthe“directcost”incurredintheproductionofanygoodsorservices.Itincludesmaterialcost,directremainunchanged).  SummaryEDLPisapricingstrategyinwhichacompanychargesaconsistentlylowpriceoveralong-timehorizon.Fortheconsumer,EDLPsimplifiesdecisionmakingandsearchcosts. Forthecompany,EDLPminimizesmarketingcosts,staffefforts,andhelpswithdemandforecasting.Ahigh-lowpricingstrategyoffersgreaterprofitabilitythanEDLP. RationaleBehindEverydayLowPricingInseveralmarketingstudies,consumershaveindicatedthattheyaremorecontentwithconsistentlylowpricesinsteadofwildpriceswings.ThisiswhytheEDLPstrategyworkseffectively: 1.SimplifieddecisionmakingConsumersdonothavetoworryaboutproductsgoingonsaleinthefollowingweeks. 2.ReducedconsumersearchcostsConsumerscanspendlesstimecomparingpricesamongdifferentstoresandsearchingforthebestdeal.EDLPpromisesconsumersconsistencyintheirprices. AdvantagesofEverydayLowPricingBusinessesbenefitfromanEDLPstrategyaswell.Themarketingstrategyhelpswith: 1.DemandforecastingEDLPhelpsstoresreducedemandfluctuationsthatwouldnormallyoccurduringsalespromotions.DemandforecastingDemandCurveThedemandcurveisalinegraphutilizedineconomics,thatshowshowmanyunitsofagoodorservicewillbepurchasedatvariouspricesbecomesmucheasier. 2.MarketingcostsAdvertisingislessexpensiveasstoresdonotneedtoindividuallypromoteeachsaleitemandadvertisesaleevents.Forexample,itwasnotedthatin1994,Walmart,whichusedanEDLPstrategy,wouldonlyneedtopurchaseadvertisementsinanewspaperonamonthlybasiswhilecompetitorswouldadvertiseeveryweekoftheyear. 3.StaffingeffortsStoressavethetimeandeffortinhavingtoindividuallymarkdownitemsduringsaleevents. EverydayLowPricingExample:WalmartWalmartIncWalmartMarketingMixWalmartisapowerhouseofabusiness,andoneofitskeystrengthsisitsmarketingmix.Survivingintheretailmarketrequiresmorethanjustluck.isacompanythathasgainedsignificantsuccessduetotheireverydaylowpricingstrategy.Themajorretailerofferslowpricestoconsumersthroughouttheyear,insteadofofferinglowpricesduringsaleevents.Thecompanyadoptedthestrategyfollowingitsfounding,buildingitsreputationonbeingthestorethatoffersconsumersthelowestpriceseveryday.ItcanbesaidthatWalmartembodiesthepricingstrategyofEDLP.Althoughthestrategyresultsinslimmargins,theretailerisabletogeneratesignificantprofitsfromhighsalesvolume.Walmart’spricingstrategyhelpedthecompanyestablishitselfasahighlyreputablecompanyofferinglowprices.Thecompanytodayoperatesmorethan8,500storesandservesinexcessof200millionconsumersaroundtheworld. EverydayLowPricingvs.High-LowPricingAnotherpricingstrategycommonlycontrastedwitheverydaylowpricingishigh-lowpricing.High-lowpricingreliesonpromotionsandsaleeventstotemporarilyreducepricesandencouragepurchases.Toquicklycomparethetwopricingstrategies:Everydaylowpricing:Chargesacontinuouslylowpriceforaproductoveralong-timehorizon.High-lowpricing:Chargesahighpriceforaproductandlatersellsitatalowpricethroughsaleeventsorpromotions. Witheverydaylowpricingandhigh-lowpricingconsideredthetwomainpricingstrategiesbyretailers,there’sbeenanunendingdiscussionaboutwhichstrategyismoreprofitable.A1994studyconcludedthatretailersmademoreprofitinahigh-lowpricingstrategythanwithusinganEDLPstrategy–settinglowandstablepricesdidnotgenerateenoughsalestosustainthelowerprofitmargin. RelatedReadingsCFIofferstheFinancialModeling&ValuationAnalyst(FMVA)®BecomeaCertifiedFinancialModeling&ValuationAnalyst(FMVA)®CFI'sFinancialModelingandValuationAnalyst(FMVA)®certificationwillhelpyougaintheconfidenceyouneedinyourfinancecareer.Enrolltoday! certificationprogramforthoselookingtotaketheircareerstothenextlevel.Tokeeplearningandadvancingyourcareer,thefollowingCFIresourceswillbehelpful:5P’sofMarketing5P'sofMarketingThe5P'sofMarketing–Product,Price,Promotion,Place,andPeople–arekeymarketingelementsusedtopositionabusinessstrategically.The5P'sofAIDAModelAIDAModelTheAIDAmodel,whichstandsforAttention,Interest,Desire,andActionmodel,isanadvertisingeffectmodelthatidentifiesthestagesthatanindividualBeachheadStrategyBeachheadStrategyThebeachheadstrategyreferstofocusingresourcesonasmallmarketareatoturnitintoastrongholdbeforeenteringthebroadermarketMarketPositioningMarketPositioningMarketPositioningreferstotheabilitytoinfluenceconsumerperceptionregardingabrandorproductrelativetocompetitors.TheobjectiveofmarketFinancialAnalystCertificationBecomeacertifiedFinancialModelingandValuationAnalyst (FMVA)®BecomeaCertifiedFinancialModeling&ValuationAnalyst(FMVA)®CFI'sFinancialModelingandValuationAnalyst(FMVA)®certificationwillhelpyougaintheconfidenceyouneedinyourfinancecareer.E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