Effects of pricing strategies and product quality on private label and national brand performance

Journal of Retailing and Consumer Services ∎ (∎∎∎∎) ∎∎∎–∎∎∎

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Effects of pricing strategies and product quality on private label and national brand performance Rainer Olbrich, Hans Christian Jansen n, Michael Hundt University of Hagen, Universitätsstr. 11, 58097 Hagen, Germany

art ic l e i nf o

Keywords: Pricing Quality National brand Private label EDLP HiLo

a b s t r a c t Using product test ratings and panel data from more than 35,000 participating households in Germany, this study addresses the impacts of price, quality, and promotion shares on the market shares of different products, including national brands and private labels, as well as food and non-food products. The results of a path analysis reveal important differences across the four segments, as well as insights regarding the use of everyday low price and high–low retail pricing strategies. The findings also lead to key implications for manufacturers and retailers. & 2016 Elsevier Ltd. All rights reserved.

1. Introduction In the German consumer goods market, concentration and crowding at the retail level has proceeded steadily over time, leading to greater sales consolidation among a few, large retailers (Anders, 2008; Olbrich and Grewe, 2013; Weiss and Wittkopp, 2005). The underlying concentration process parallels several developments related to price, product, and product range policies (Lamm, 1981; Olbrich and Grewe, 2009, 2013; Olbrich et al., 2009). For example, regarding the ranges of products, some retailers have chosen to adopt dual roles, offering their own products and services (i.e., private labels), often at a lower price than comparable national brands (Méndez et al., 2008; Olbrich and Grewe, 2009), rather than solely distributing goods produced by the branded goods industry. The resulting proliferation of private labels invokes strong price competition (Connor and Peterson, 1992; Olbrich and Grewe, 2013; Olbrich et al., 2009, 2014). This study investigates the impact of price, pricing strategy, and product quality on the overall market share of a particular product, in an effort to answer two key research questions: RQ1:What impacts do product price, pricing strategy, and product quality have on the market shares of different product and brand types? RQ2:What differences arise between national brands and private labels? Between food and non-food products? We address these questions in the dynamic German retailing sector and thereby make several substantive contributions to n

Corresponding author. E-mail addresses: [email protected] (R. Olbrich), [email protected] (H.C. Jansen), [email protected] (M. Hundt).

literature. Even as retail market conditions continue to change rapidly, current marketing literature lacks an up-to-date analysis that relies on actual purchasing data or product quality information (Anders, 2008; Groeppel, 1993; Machek, 2012). We seek to close this gap by analyzing the determinants of market share according to German panel data that reflect reports by more than 35,000 households. In addition, we account for product quality information as one possible determinant of market share. Instead of surveys or experiments, which are common in prior research, we investigate actual purchasing behavior using a broad, representative database. In so doing, we address potential differences across expressed attitudes, intentions, and behavior (Belk, 1985). Furthermore, we differentiate between national brands and private labels at the product level (brand type) and between food and non-food products at the commodity group level (product type). Thus, we are able to highlight differences among the four segments. To reach these insights, we start with a foundation in research that shows that consumers tend to link the perceived quality of private labels with their view of the retailer. Private-label product quality thus is particularly important for defining the retail brand and establishing store attractiveness, and retailers seek sufficiently high quality to avoid negative carryover from their private label to their retail brand (Olbrich and Jansen, 2014; Vahie and Paswan, 2006). Unlike prices, product quality is difficult to change and cannot be adjusted quickly. For national brands, product quality also has the critical task of justifying any price premium and ensuring a competitive advantage (Steenkamp et al., 2010). Yet the prevalence of private labels continues to increase, in turn creating greater price competition between private labels and corresponding national brands, as well as among the various private labels offered by different retailers (Blattberg and Wisniewski,

http://dx.doi.org/10.1016/j.jretconser.2016.01.012 0969-6989/& 2016 Elsevier Ltd. All rights reserved.

Please cite this article as: Olbrich, R., et al., Effects of pricing strategies and product quality on private label and national brand performance. Journal of Retailing and Consumer Services (2016), http://dx.doi.org/10.1016/j.jretconser.2016.01.012i

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1989; Olbrich and Grewe, 2013). Therefore, retailers actively seek different pricing strategies to establish unique profiles (Ellickson and Misra, 2008). For example, a retailer that adopts a high–low (HiLo) promotion strategy tries to stimulate customer demand through time-limited price promotions. Price-based special offers aim to attract consumers to the store while also signaling price competency for the assortment. In contrast, a retailer with an everyday low price (EDLP) strategy largely eliminates price promotions and offers products for a consistently low, non-varying price (Pechtl, 2004). All these competitive factors—prices, price strategies, and product quality decisions—also depend on the product type, such as whether the offering is a food or a non-food product (Böhm et al., 2007; Olbrich and Jansen, 2014). Food invokes habituated purchasing behavior; consumers generally use non-food products for longer periods. Non-food products also are associated with greater expenses, perceived purchase risk, and involvement in the decision process. Accordingly, retailers can and should strategically adjust several factors to succeed in competitive retail environments: their pricing policies (price levels and pricing strategy), the quality of the products in their assortment, and considerations of the differences between national brands and private labels, as well as between food and non-food products. To highlight the necessity of such considerations, Fig. 1 details the notable revenue shares of private labels of food products in several countries (METRO AG, 2015). For example, in Germany, private labels enjoy an average market share of 34.5 percent. In general, market share represents an important economic figure for decision makers (Buzzell et al., 1975), because it reflects the firm's own position in relation to competitors’. In this sense, market share provides an indicator of the likely long-term success of a company. The cutthroat competition in the consumer goods sector also has moved market share into a central position as a

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target outcome for many companies. Yet empirical literature often fails to measure market share or its underlying consumer behaviors and focuses instead on preferences, purchase intentions, or queries to proxy for recent and current purchasing behavior, generally due to a lack of available data (e.g., Anselmsson and Johansson, 2009; Sinha and Batra, 1999; Walsh and Mitchell, 2010). Yet actual retail market conditions, including intensified competition among retailers competing for market share by offering national brands and private labels in food and non-food sectors, indicates the powerful need to identify the primary determinants of market share. From our empirical findings, we also derive managerial implications for manufacturers and retailers. In particular, the results of our multigroup path analysis reveal the impacts of price, pricing strategy, and product quality on market shares. By calculating critical ratios for differences, we compare both brand and product types and find that in the food sector, a higher price results in a lower market share for both national brands and private labels, whereas in the non-food sector, the reverse is true. For all four segments, higher product quality leads to more market share. However, for the pricing strategy, the results are more controversial. That is, for national brands, a HiLo pricing strategy seems appropriate, because it increases market share for both food and non-food products. For private labels though, an EDLP pricing strategy is preferable; the increased use of price campaigns for private labels goes hand-inhand with reductions in their market share. In the next section, we present the theoretical background on pricing strategies and product quality, from which we derive several propositions regarding food/non-food national brands/ private labels. After outlining the data and method for our empirical study, we discuss the results and present managerial implications for manufacturers and retailers, while also noting some limitations of our study.

44.5% 42.0% 41.4% 34.5% 32.9% 31.3% 28.5% 27.4% 27.2% 25.4% 25.2% 25.2% 24.3% 23.6% 22.7% 22.7% 22.4% 17.6%

0%

10%

20%

30%

40%

50%

Fig. 1. Revenue Share of Private Labels in 2014.

Please cite this article as: Olbrich, R., et al., Effects of pricing strategies and product quality on private label and national brand performance. Journal of Retailing and Consumer Services (2016), http://dx.doi.org/10.1016/j.jretconser.2016.01.012i

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2. Literature overview 2.1. Pricing strategies In retailing, an ideal pricing strategy reflects a well-informed choice between offering relatively stable prices across a wide range of products or emphasizing deep and frequent discounts on a smaller set of goods (Ellickson and Misra, 2008). The first strategy implies everyday low pricing (EDLP), whereas the second refers to promotional pricing (HiLo), such that the two strategies represent a continuum (Ailawadi and Keller, 2004; Hoch et al., 1994). When they use EDLP, retailers quote a fixed, low price for every time period and avoid price promotions, and they target consumers who are not willing to expend substantial time or effort to find the best prices (e.g., visiting different stores, looking for coupons). With a HiLo approach, retailers instead use frequent promotional prices to attract consumers who actively search for attractive prices for individual products. However, their normal product prices tend to be higher than those in EDLP stores (Ghose et al., 2005). By adopting a position according to these strategic pricing poles, retailers try to influence consumers’ store choices and purchasing behavior (Ailawadi and Keller, 2004). Bell and Lattin (1998) show that large basket shoppers prefer EDLP stores, whereas small basket shoppers tend toward HiLo stores (see also Pechtl, 2004). The former shoppers are more sensitive to prices across many categories, because they purchase in many product categories and lack the flexibility to take advantage of occasional price deals. Therefore, large basket shoppers seek lower prices for their complete basket by purchasing in EDLP stores. Small basket shoppers instead can take advantage of price variations for single products over time. By purchasing products when they are on sale, they lower their overall basket price, even if the average prices in the HiLo stores they prefer are comparatively high. Ho et al. (1998) also show that the average prices in HiLo stores are comparatively higher, but the average purchase quantities are lower. Therefore, a HiLo pricing strategy increases purchasing frequency, whereas an EDLP approach decreases it. Furthermore, EDLP generates higher revenue per unit of time than HiLo. Such findings help explain why both pricing strategies can coexist in practice. Hoch et al. (1994) also examine the impact of category-level price changes on sales responses, using field experiments in 26 product categories sold by an 86-store grocery chain. Its inelastic response to changes in everyday prices makes an EDLP format generally inappropriate for increasing purchase quantity. In this sense, the HiLo format outperforms the EDLP format in terms of profitability. However, Ghose et al. (2005) note that manufacturers that face constant demand can better match their production level to market demand when they supply independent EDLP stores. In contrast, the supply to HiLo stores fluctuates with demand, which in turn varies in response to changing prices. To cover such fluctuating demands, retailers must carry deep and expensive inventories. Finally, Gauri et al. (2008) argue that improved service features, higher income neighborhoods, populous neighborhoods, and distance to competition are elements more associated with HiLo than with EDLP pricing strategies. Accordingly, Ellickson and Misra (2008) suggest that EDLP is usually aimed at lower income consumers with larger families. As these examples show, prior literature mainly discusses pricing strategies in relation to the stores themselves and consumers’ store choices (e.g., Bell and Lattin, 1998; Gauri et al., 2008; Ho et al., 1998). However, Bolton and Shankar (2003) show that pricing strategies often reflect the brand rather than the store level, such that several strategies might coexist within a single store. Shankar and Bolton (2004) also argue that retailers’ pricing strategies and tactics depend on upstream (e.g., manufacturer/brand, category) and downstream (customer) factors.

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Few studies combine pricing strategy with brand type though. In an EDLP setting, the price differences between national and private-label brands is more visible for consumers, but the performance of private labels remains unclear. Dhar and Hoch (1997) offer ambivalent results, in which EDLP benefits private labels only in categories with lower quality, though retailers’ promotional activities can enhance private-label shares. Furthermore, Pechtl (2004): 230 points out that EDLP-prone consumers exhibit greater brand preferences than HiLo-prone shoppers, possibly due to their higher risk awareness, which “implies that EDLP programs should use national brands and not private or virtually unknown labels.” For this investigation, we examine the impact of pricing strategies on market share by differentiating both between private labels and national brands and between food and non-food products. This distinction leads to differentiated insights about the impacts of pricing strategies on performance in individual product segments. 2.2. Product quality During the 1930s, comparative product tests were established in the United States. Nelson (1970), in distinguishing between experience and search goods and between durable and non-durable goods, suggests that test ratings are more applicable to purchase decisions involving experience rather than search goods and for durable rather than non-durable goods. Marquardt and McGann (1975) also underline the importance of test ratings for consumer well-being but caution that heavily advertised products tend to earn unusually high proportions of top quality ratings. They also establish that it is less likely that consumers will purchase products with poor test ratings. Especially when they consider new products, consumers may sense a purchase risk, due to their lack of experience. Many of them are risk averse, such that negative information and poor product quality have strong impacts on consumers’ decisionmaking processes (Kahneman and Tversky, 1979). As Mizerski (1982) points out, unfavorable ratings have significantly stronger effects on product performance and purchasing behavior than do favorable product ratings. In this context, negative product performance exerts a greater impact on consumers’ decision not to buy a product (Shen and Wyer, 2008). However, product tests can change the scope and structure of consumers’ information processing (Kaas and Tölle, 1981), in that they enable consumers to use test ratings before purchasing a product, which also prompts them to rely more on other information sources, such as the advice of store clerks. Therefore, test ratings influence not just purchasing behavior but also social impact levels. For example, poor product quality may lead to increased customer churn rates or direct dissent, in the form of negative word of mouth or complaints. Previous research also investigates the effect of product quality on key outcomes, such as revenue or sales volume. The most discussed studies in this context are based on the PIMS database (Buzzell and Gale, 1987). In general, studies find that product quality has a strong impact on business success, as represented by market share, among other key variables. In an interview study, Fritz et al. (1984) find that 82 percent of interviewed retailers reported diminished sales volumes subsequent to the publication of a poor test rating, leading to revenue decreases of 15–27 percent. Nineteen percent of interviewed manufacturers indicated a significant drop in revenue due to poor product quality, and 92 percent of all interviewed stores and mail-order companies eliminated products that scored poorly on the tests from their assortments, though this level was only 33 percent among specialized retail stores. In another survey, Hilger et al. (1984) find that 40 percent of the interviewed department stores lowered the

Please cite this article as: Olbrich, R., et al., Effects of pricing strategies and product quality on private label and national brand performance. Journal of Retailing and Consumer Services (2016), http://dx.doi.org/10.1016/j.jretconser.2016.01.012i

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prices of products that earned poor quality ratings. Jin and Leslie (2003) also uncover altered consumer behavior and shifts in demand away from poor providers toward good providers. In a restaurant setting, they observe that demand increases at restaurants with good hygiene reviews but decreases for providers that receive poor hygiene reviews. Objective quality has a greater impact on perceived quality than subjective expertise or familiarity (Cordell, 1997), though quality perceptions also depend on consumers’ knowledge. Similarly, Moussa and Touzani (2008) highlight that quality information can reduce asymmetric information, such that consumers can better judge product quality, leading them to develop stronger intentions to buy. Publicity relates to product quality perceptions too (Dean, 2004). Ahluwalia et al. (2000) argue that commitment influences consumer behaviors in response to negative publicity; Reinstein and Snyder (2005) find that negative reviews have significant negative effects on revenue. Simonsohn (2011) further asserts that expert advice sways consumer demand, though the link is difficult to uncover, because expert recommendations may correlate with other information consumers hold.

3. Propositions Fig. 2 presents our research framework, with which we analyze the impact of product price, promotion share, and product quality on the market share of corresponding products. We adopt a multigroup methodology to account for the moderating effects of both product type and brand type. To estimate the impacts of these independent variables on market share, we derive our propositions on the basis of prior literature. Our in-depth literature review reveals that product quality positively influences the market shares of both food and non-food products, as well as private labels and national brands (Garvin, 1984; Hoch and Banerji, 1993). If the quality of a product is poor, it loses attractiveness and its market share decreases, independent of product or brand type. In addition to lowered consumer demand, retailers react to poorly performing products in ways that likely decrease their market share further, such as by delisting poor quality private labels and national brands (Olbrich et al., 2016). Therefore, in all cases, higher quality should result in greater market share. Price promotions also are independent of the food versus nonfood product type, suitable for any products that are well known to the customer and widely available. For retailers, well-known, ubiquitous national brands are appealing targets for price promotions, because they can attract customers to stores (Ailawadi et al., 2001). In this context, price promotions represent the retailer's effort to define its brand in the competitive environment (Olbrich et al., 2014). We use promotion share, defined as all sales at promotional prices divided by total sales (at normal and

promotional prices), as an indicator of price promotions. A high promotion share signals a frequent use of price promotions (i.e., HiLo pricing strategy) and a low promotion share signals an EDLP pricing strategy (Ellickson and Misra, 2008). We predict that a high promotion share attracts customers and ultimately results in higher market share for the corresponding, promoted national brands. However, for private labels, a high promotion share may lead to low market shares (Dhar and Hoch, 1997), for both food and nonfood products. Price promotions of private labels likely represent a strategic effort to dispose of poorly selling products. In addition, customers that choose to buy private labels generally seek nonvarying prices, to reduce the effort involved in comparing prices (Olbrich and Grewe, 2009; Ortmeyer et al., 1991). Retailers accordingly use private labels to signal their pricing competency and increase the attractiveness of their stores (Olbrich and Jansen, 2014). Therefore, private labels should be offered at a low, nonvarying price, which results in a low promotion share for these products. We assume that price has a negative impact on market share: A higher price decreases the market share of the corresponding product (Dhar and Hoch, 1997). However, this relationship may exhibit varying strengths for segments of food/non-food national brands/private labels. For food products, previous studies show that consumers’ price consciousness drives purchases of private labels (e.g., Anselmsson and Johansson, 2009; Baltas, 1997; Burger and Schott, 1972; Hsu and Lai, 2008; Lin et al., 2009; Olbrich et al., 2014; Sinha and Batra, 1999). Their low prices provide an incentive for consumers to buy private labels instead of national brands. For national brands, price still is important, but its impact on consumers’ buying decision is weaker than that for private labels. Therefore, the impact of the price of private-label food products on their market share should be greater than the impact for national brand foods. For national brands, we also predict a different relationship between price and market share. Non-food products generally are used for longer than food products (e.g., a bottle of detergent is used for more time than a carton of milk). The usage patterns suggest non-food products may be adopted in conjunction with more expensive, previous purchases, such as detergent used to watch an expensive shirt. Therefore, consumers’ involvement in this purchase process should be higher (Laurent and Kapferer, 1985; Rothschild, 1979). Perceived purchase risks also tend to be lower when prices are higher, because consumers assume a linear relationship between price and quality (Olbrich and Jansen, 2014). Accordingly, we anticipate that for non-food products, price has a smaller impact on market share than it does for food products. Noting the conventional wisdom about the price–quality relationship, we even predict that a higher price may result in a higher market share for some non-food national brands.

4. Data and method

Product Price

Promotion Share

Market Share

Product Quality Fig. 2. Conceptual Framework.

We gained access to a German consumer panel with purchase data about products bought by approximately 35,000 households between 2006 and 2011. The data set consists of 1,473,070 records, each representing one product bought by one household on one day. For this study, we selected as focal products roasted coffee (1,187,996 records) and detergent powders (285,074 records). We chose these product categories according to the availability of test ratings and to account for differences between food and non-food products as explanatory factors for distinct purchasing behaviors (Böhm et al., 2007; Olbrich and Jansen, 2014). The panel's representative character enables us to calculate market shares, promotion shares, and prices for each product.

Please cite this article as: Olbrich, R., et al., Effects of pricing strategies and product quality on private label and national brand performance. Journal of Retailing and Consumer Services (2016), http://dx.doi.org/10.1016/j.jretconser.2016.01.012i

R. Olbrich et al. / Journal of Retailing and Consumer Services ∎ (∎∎∎∎) ∎∎∎–∎∎∎ Table 1 Distribution of national brand and private label sales. Product type

National brand

Private label

Food Non-Food

78.95% 43.44%

21.05% 56.56%

Both roasted coffee as a food and detergent powder as a nonfood product are designated for daily use. However, the consumption of coffee should induce less risk than the use of detergent powders. If coffee tastes poor, it is the only damage the consumer will suffer. In contrast, laundry needs to be cleaned both well and gently, to preserve long-term use of clothing. Thus, the purchase process of detergent powders likely differs from the purchase process for coffee, characterized by not only higher involvement but also a greater need for quality. Our database covers 35,303 households. With regard to the demographics of the panel sample, most households have no children (81.16%) or one child (10.41%) under the age of 14. They are relatively evenly split among households that consist of one person (35.33%), two persons (35.99%), or more (28.68%). Many households earn net income between 1,250 € and 1,499 € (10.21%) or between 2,000 € and 2,249 € (10.58%). Table 1 presents the distribution of private labels and national brands. For food products, national brands dominate. For non-food products, private labels outnumber national brands. Thus, we find differences in the distribution of food versus non-food products, as well as between private labels and national brands. To measure product quality, we supplemented the consumer panel data with test ratings published by Stiftung Warentest (StiWa), in three issues of its magazine between 2009 and 2010. StiWa performs impartial and objective product tests. To ensure nonalignment, it conducts independent test planning, does not accept advertisements in its publications, and relies on anonymous purchases of test samples. We could match 56 tested products with data from the consumer panel. The products earned average market shares of 28.96 percent for non-food and 47.40 percent for food products, in terms of their sales volume within their commodity groups. To address our research questions, we aggregated the data set monthly for each product. The observation period covers the years 2006 to 2011, so the resulting data set consists of a maximum of 72 records for each product; each record includes the price, promotion share, product quality, and market share of one product in one month. For example, for food national brands, we analyzed 19 products that could have provided a maximum of 1,368 cases ( ¼19

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products  72 months). However, the market introduction of a few products was later than the start of our observation, so we obtained 1,139 observations for our database (see Table 2). This approach enabled us to avoid imbalances across different products or commodity groups. In calculating the quality and price measures, we considered them relative to the average quality or price in the commodity group for the selected products for each month. In addition, we distinguished between national brands and private labels. Our path analysis, based on a multigroup methodology, used an asymptotically distribution-free estimator to estimate the impact of the price, promotion share, and product quality simultaneously on the market share of the corresponding product, even as we differentiated between food and non-food products and between national brands and private labels. Finally, we calculated critical ratios for differences to compare the four segments. These z-values represent differences across estimates, divided by an estimate of the standard error of the difference.

5. Results and discussion To determine the impacts of prices, pricing strategies, and product quality, we measured the market share of each product according to the sales volume represented in the German household panel data, while differentiating between national brands and private labels and between food and non-food products. Table 2 contains the descriptive statistics for our aggregated data set, including the number of cases (N), minimum and maximum values, means, and standard deviations for product price, product quality, promotion share, and market share, separated by brand and product type. Using national brand food products as an example, our analysis featured 1,139 cases. Each case described the four focal variables for one product in one month. Thus product price was relative to the commodity group, and with an average price of 100 percent for all food products (private labels and national brands), the minimum price of a national brand was 46 percent and the maximum was 173 percent. On average, national brands were slightly more expensive (102.3%), and the standard deviation in product prices was .23846. (The statistics for the other variables in Table 2 reflect similar approaches.) For product quality, a higher value represented better quality, such that values greater than 1 represented better-than-average quality. In Table 3 we present the results of the path analysis, which highlights the impact of the independent variables on market share. All paths were highly significant. The explained variance

Table 2 Descriptive statistics. Brand type

Product type

Variable

N

Minimum

Maximum

Mean

Standard deviation

National brand

Food

Product price Product quality Promotion share Market share Product price Product quality Promotion share Market share Product price Product quality Promotion share Market share Product price Product quality Promotion share Market share

1139

.46 .81 .00 .00 .70 .92 .00 .01 .62 .77 .00 .00 .72 .93 .00 .01

1.73 1.71 1.00 .18 2.03 1.14 1.00 .07 1.46 1.80 1.00 .06 1.36 1.20 1.00 .10

1.0230 .9958 .4771 .0235 1.4418 1.0110 .3741 .0158 .8783 1.0061 .1153 .0093 .8839 .9943 .0392 .0108

.23846 .21209 .30947 .03249 .23508 .07894 .20119 .00949 .18585 .29007 .22683 .01321 .06355 .04859 .10767 .01706

Non-Food

Private label

Food

Non-Food

570

785

1096

Please cite this article as: Olbrich, R., et al., Effects of pricing strategies and product quality on private label and national brand performance. Journal of Retailing and Consumer Services (2016), http://dx.doi.org/10.1016/j.jretconser.2016.01.012i

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Table 3 Impacts of product price, promotion share, and product quality on market share. Brand type

National brand Private label

Overall

nn

Product type

Food Non-Food Overall Food Non-Food Overall Food Non-Food

Impact on market share Product price

Promotion share

Product quality

 .098nnn .270nnn  .097nnn  .395nnn  .067nn  .225nnn  .177nnn .098nnn

.464nnn .323nnn .469nnn  .250nnn  .091nnn  .175nnn .410nnn .079nnn

.228nnn .197nn .226nnn .336nnn .397nnn .246nnn .213nnn .353nnn

p o.01. p o.001.

nnn

(R2) of market share was .34 for food national brands, .32 for food private labels, .40 for non-food national brands, and .18 for nonfood private labels. Therefore, for all four segments, the explained variance in market share is quite substantial. A higher price led to a lower market share for food (standardized estimate b ¼ .177, po .001), across both national brands (b¼  .098, p o.001) and private labels (b ¼ .395, po .001). However, the market share of private-label food was affected to a significantly greater degree (critical ratio z ¼ 3.832, p o.001). For the non-food product though, a higher price could lead to increased market shares (b¼.098, p o.001). Among private labels, the predicted negative relationship between price and market share emerged but was weak (b ¼ .067, p o.01); for national brands, market share actually increased with a higher price (b¼ .270, p o.001). This finding contrasts with traditional market theory, according to which sales decline after price increases. It also confirms that consumers take price–quality relationships into consideration, likely to reduce their quality uncertainty and purchase risk, so higher prices help increase market shares. Thus, higher prices were significantly more detrimental to the market shares of food (b¼  .177, po .001) than non-food (b ¼.098, p o.001; z¼ 14.771, p o.001); a low price also was more important for private labels (b¼  .225, p o.001) than for national brands (b¼  .097, po .001) as a means to increase market shares (z ¼ 8.210, p o.001). We posit that for private labels, competition is not based primarily on product innovation or product diversification. Rather, for the generally homogeneous products in our data set, price represents a key competitive factor. The promotion share indicates retailers’ pricing strategies, in that EDLP is characterized by relatively steady prices and the absence of price promotions (i.e., promotion share close to zero), whereas a HiLo pricing strategy features the frequent use of price promotions and a higher promotion share. Our results showed that a higher promotion share increased the market share for national brands (b¼.469, po .001), whether the products were food (b¼ .464, p o.001) or non-food (b¼.323, p o.001). We found a different relationship for private labels though (b ¼  .175, p o.001; z ¼  30.312, po .001): A higher promotion share resulted in a lower market share for both food (b ¼ .250, p o.001) and non-food (b¼  .091, p o.001) products. Thus, successful products (in terms of market share) were priced using a EDLP pricing strategy if they were private labels but a HiLo pricing strategy if they were national brands. Across all four conditions, higher quality resulted in a higher market share. The effect was slightly stronger for private labels (food: b ¼.336, p o.001; non-food: b¼ .397, p o.001) than for national brands (food: b ¼.228, p o.001; non-food: b¼.197, p o.01). That is, in the competition among private labels, both price and quality (“good and cheap”) drove market shares. Because private

labels generally adopt an entry price level, such that their prices tend to be similar, gaining a competitive advantage solely by adjusting prices is difficult. In turn, product quality had a stronger impact on the market share of private labels than that of national brands (food: z¼ 8.035, po .001; non-food: z¼8.835, p o.001). Finally, the test ratings by the independent organization StiWa raised consumers’ acceptance of private labels, by communicating their product quality. In conclusion, both brand type and product type moderate the relationships of the independent variables product price, promotion share, and product quality with the dependent variable market share.

6. Implications The results of this study have several important implications for manufacturers and retailers. The market share performance of national brands does not depend as heavily on the price as it does on promotion share and product quality. For manufacturers of non-food products, a higher price even may lead to higher market shares. Such findings are appealing for manufacturers, which often have limited influence over the prices that customers see, because retailers in Germany possess substantial pricing autonomy (Olbrich and Buhr, 2004; Olbrich and Grewe, 2013; Olbrich et al., 2014). Therefore, instead of focusing on prices, manufacturers should consider increased uses of price promotions, which often are passed directly on to customers, such that they give the retailer an incentive to promote their product. This strategic move indirectly increases price promotions and may have a positive influence on the market share of the corresponding product. As Shankar and Bolton (2004): 45 point out, manufacturers that try to establish “higher relative brand prices at the retail level could distribute primarily through stores that are less price consistent, more promotion intensive, and more price-promotion coordinated.” However, because frequent price promotions can damage the image of the national brand, they demand some caution (Grewal et al., 1998; Olbrich and Grewe, 2013). In addition, manufacturers must make product quality a priority. It is critical to distinguish a manufacturer’s national brands from competitive private labels, to appeal to quality-oriented customers (NenyczThiel and Romaniuk, 2014). We recommend that manufacturers focus on price promotions and product quality, instead of a low price, to compete with private-label options. For retailers, we highlight the need to differentiate between national brands and private labels. The primary goal of any retailer is to increase not the market share of a singular product but the overall purchases in the store that ultimately increase store-level revenues and profit. In this effort, the implications of this study are fourfold. First, retailers frequently use private labels to attract customers and bind them to the store. Especially for products that consumers buy frequently, private-label versions have powerful impacts on the retailer's pricing competence image. To gain competitive advantages with these offerings, retailers should apply low prices to their private labels (i.e., entry-level price). Because low prices are easy for competitors to copy, often in less than one business day, retailers also must keep product quality in mind; this competitive advantage cannot be imitated readily. That is, retailers need to find a way to establish a low, market-oriented price and high quality for their private labels, offering products that are capable of satisfying the basic needs of customers. Therefore, implementing an EDLP pricing strategy aimed at this target market should increase market shares and help sustain performance in a competitive environment. Second, for the national brands they carry, retailers should rely on price promotions and adopt a HiLo strategy. National brands

Please cite this article as: Olbrich, R., et al., Effects of pricing strategies and product quality on private label and national brand performance. Journal of Retailing and Consumer Services (2016), http://dx.doi.org/10.1016/j.jretconser.2016.01.012i

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tend to be better known than private labels, so price promotions on these familiar products may increase store attractiveness. To avoid negative carryover effects to the retail brand, retailers should avoid including poor quality products, with low test ratings, in their price promotions (Jansen et al., 2014). However, other than these price promotions, national brands do not need to be priced low. The harmful impact of higher prices on market shares is rather weak, and in some cases, a higher price even can increase market shares. Furthermore, retailers might use high-priced national brands to signal the attractiveness of their low-priced, private-label alternatives (i.e., umbrella pricing).

7. Limitations and further research Several limitations of our study offer opportunities for additional research. For example, information about the households that contribute these data could offer an interesting extension. By taking household information into account, further research could draw insights about different buyer types (e.g., smart shoppers), according to their sociodemographic and psychographic attributes, and thereby lead to a deeper understanding of ways to address different buyer types. In certain circumstances, household net income could be a promising topic for further analysis (Olbrich et al., 2014). Our data were limited to sales; we hope additional research takes profits into consideration too. Profits are a key determinant, and increased market shares do not necessarily produce higher profits. A loss of market share may be acceptable if overall profits still rise. However, information about profits tends to be protected carefully by retailers and is difficult to access. Finally, this research did not address a wide range of commodity groups or different products. Additional research should investigate other food and non-food products, including higher priced products that tend to induce consumer involvement (e.g., alcoholic beverages, personal care products).

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Please cite this article as: Olbrich, R., et al., Effects of pricing strategies and product quality on private label and national brand performance. Journal of Retailing and Consumer Services (2016), http://dx.doi.org/10.1016/j.jretconser.2016.01.012i