How Store Location and Pricing Structure Affect Shopping Behavior (page 1 of 3)

Its aisles are easily navigated due to its small size and the customer service can't be beat. The local Home Depot requires a 20-minute drive, not to mention that its size and layout are overwhelming even to the most avid handyman. But, unquestionably, Home Depot offers better prices, and you wouldn't mind picking up a few garbage cans while you are there. As the smart shopper, which store would you choose?

This is exactly the type of question that Wharton marketing professors David Bell and Teck-Hua Ho, and Christopher Tang, professor at the Anderson School at the University of California at Los Angeles, tackle in their new study, "Store Choice and Shopping Behavior: How Price Format Works."

As part of their research, the authors take a close look at the shopping behavior of consumers to determine what makes shoppers choose one place over another and how retail managers can drive traffic to their stores. While the authors offer a complex explanation of consumer behavior, their message is simple: In order to improve store performance, retailers must begin to think like shoppers.

Research on retailing typically attributes the success of a store to its location. At the same time, marketing experts have focused a great deal of attention on the role of pricing in store performance, but without considering location. In this recent study, Bell, Ho and Tang provide managers with a new shopping framework that takes both criteria into account. By weighing such factors as distance to the store, customer service, familiarity with layout, product assortment and pricing strategies, a store manager can begin to predict how and where people will shop.

EDLPs and HILOs

Given the importance of pricing to decision-making in the retail environment, the authors start with a look at the various retail price formats. A wide range of possibilities is available in terms of pricing strategy, with the "Every Day Low Price" (EDLP) store on one end and the store which offers promotional pricing, known as the HILO store, on the other. Retailers like Wal-Mart employ the EDLP strategy and typically offer low prices all the time. As a result, there is minimal variability between the regular price and discount price. In contrast, a HILO store, such as Ann Taylor, has a greater disparity between the highest and lowest price, relying on sales and promotion strategies to entice the buyer.

Certain characteristics are associated with each pricing format. For example, the EDLP store often has a large number of items but a smaller selection of brands, less convenient format and very small fluctuations in prices. Using their shopping framework, the researchers characterize EDLP stores as mostly having a low fixed utility (less assortment, less convenient) but a high variable utility (lower prices). "Fixed Utility" captures costs and benefits that are essentially independent of the specific items purchased on a given trip, while "variable utility" captures factors that change according to the items purchased.

The "Every Day Low Price" format generally appeals to the cost-conscious buyer. People who shop at the EDLP stores often buy a large number of items each trip and shop less often than their counterparts at the HILO stores, the study found. Because EDLP shoppers normally buy many things in one trip, they benefit from the small average cost savings on individual items.

On the other hand, the promotional pricing or HILO format has been associated with a high fixed utility—that is, convenient format, high quality service, good assortment of products—but, in general, a low variable utility because these stores tend to have higher prices.