Explain and give an example of Target costing yield management pricing leader pricing and EDLP

With a revenue of 486 billion USD in the year 2016, Walmart is the world’s largest company by revenue. It is also the largest private employer with 2.3 million employees and operates more than 11,000 outlets. Today Walmart contributes about 2% to the US economy. Walmart achieved their success in large part due to their Everyday Low Price (EDLP) strategy, a strategy that offers low prices to customers throughout the year instead of offering these low prices only on sales events. This strategy increases both sales and customer loyalty.

EDLP results in Walmart having less costs incurred for advertising as they advertise on a more regular basis and therefore incur less cost per advertisement. Consumer demand becomes more predictable as their prices change less frequently and predictable demand leads to having fewer incidents of overstocking/understocking. High-low pricing, the pricing strategy of offering goods at less prices during sales events is adopted by many other companies. High-low pricing may benefit more frequent shoppers who can exploit sales promotions. However, people are shopping less frequently in these market segments and therefore prefer having a low price whenever they visit the store.

How Walmart offers low prices

Walmart’s strategy of keeping prices low has been in place ever since the company was founded. The philosophy of keeping prices low prices hinged on having a large scale and minimizing operating costs. The low-price model has gained momentum over the years allowing Walmart to offer even lesser prices and incur less cost.

Walmart has a presence in almost every market segment and a reach to a very wide customer base. It certainly helps that there is a Walmart outlet within 15 miles of 90% of the American population.

They are able to achieve their current levels of operational efficiency can be attributed to their state of the art supply chain and inventory levels. The supply chain management is based on electronic product information, dealing directly with manufacturers and having warehouses locations near to outlets. With this strategy Walmart is able to know what is needed, how much is needed and when it is needed. Having warehouses, all located within 130 miles of outlets and a trucking fleet owned by Walmart further reduces costs incurred.

However, not all the methods employed by Walmart to reduce prices can be seen as positive. Walmart gives meagre wages to employees who may even be asked to work overtime without extra pay. This has caused protests by the underpaid workers against Walmart.

Protests against Walmart for meagre employee benefits

 Since many companies rely on Walmart for their revenue, they hold considerable bargaining power with them, enabling Walmart to push them to cut prices.

 Reactions from competitors

Walmart has gained immense success from EDLP. However, not all of its competitors followed suit and adopted the strategy. It is expensive for a retailer to switch to EDLP and the retailer needs to maintain EDLP for a long time for the customers to associate the brand with lower prices.

There are other retailers in the US, namely Kroger who offer goods at very low prices. Kroger unveiled a “Restock Kroger” plan in October 2017 that focused on even lower prices. The program seems to be successful with Kroger’s sales going up 4.5%.

Two German grocery chains, Aldi and Lidl are in the process of expansion in the US market, with prices less than Walmart or Kroger. In September 2017, Kroger’s prices were 31% higher than those of Aldi and Lidl, and Walmart’s prices were 5.3% higher than the German chains.

Aldi and Lidl are able to offer low prices by limiting inventory to a selection of few items. Whereas Walmart offers a wide range of products. Other cost-cutting techniques include displaying items in shipping cartons to make restocking easier and Lidl also requires customers to bring in their own grocery bags.

Displaying products in shipping cartons- a cost cutting technique

Reactions from consumers

Consumers can only be benefitted by the price wars as prices go down while quality is not diminished much. EDLP is preferred by today’s shoppers who are less frequent in shopping for groceries as they get low prices regardless of when they visit the stores. Moreover, when Walmart marks the price of a product as $271, consumers get the feeling that the store has already reduced the price so much that they could not offer a further discount of even $1.

Walmart’s policy of underpaying their employees has caused some distaste towards them. The large floor area of the outlets sometimes makes things difficult for shoppers as they cannot easily find what they are looking for.

Conclusion

Walmart has achieved their leader position thanks to low prices. However, Walmart is not the only player in that game anymore. Kroger, Aldi and Lidl have all joined the game. The success of Aldi and Lidl has influenced other retailers to sell at lower prices. Customers with more disposable income may gravitate towards other options they feel reflects social responsibility. Walmart stands to lose sales and revenue if the size of their target customer base, the middle class gets smaller as people are earning more money these days.

Sources

https://www.investopedia.com

https://www.businessinsider.in

https://www.psychologytoday.com

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