Evaluating consumer response to EDLPs

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Journal of Retailing and Consumer Services 15 (2008) 211–223 www.elsevier.com/locate/jretconser

Evaluating consumer response to EDLPs Ainsworth Anthony Bailey Department of Marketing & International Business, College of Business Administration, University of Toledo, 2801 West Bancroft Street, Toledo, OH 43606, USA

Abstract This paper reports on an investigation of factors influencing consumer response to every-day low prices (EDLP) policies. In study 1, an experimental study, sale proneness was found to have a significant effect on attitude toward EDLP and patronage intentions for the store implementing a new EDLP policy. Store loyalty affected patronage intentions but not attitude toward the EDLP. While there were no significant interactions between sale proneness and store loyalty, follow-up univariate tests revealed that consumers’ level of sale proneness has an impact on attitude toward the EDLP policy when store loyalty is low but not when store loyalty is high. In a follow-up survey, a number of predictions regarding the relationships among sale proneness, store loyalty, and income level and the dependent variables of attitude toward EDLP, attitude toward the retailer, and patronage intentions were made and tested. Support was found for all but two of the 9 hypotheses. Implications of the findings for retailers and future research agendas are discussed. r 2007 Elsevier Ltd. All rights reserved. Keywords: EDLPs; Promotional pricing; Retail pricing strategies

Bowing to busy consumers who are less willing to spend time searching for deals, some traditional grocery stores are cutting back on promotional discounts and moving toward the everyday low prices of Wal-Mart Stores Inc. and other discounters. In recent months, several regional grocery chains have reduced prices on everything from Kraft macaroni and cheese to Ragu pasta sauce in an effort to lure back shoppers who have defected to discount grocersyNow, the prevalence of shops such as Costco Wholesale Corp., dollar stores, and discounters such as Wal-Mart has conditioned consumers to expect inexpensive goods every day (Adamy, 2005). 1. Introduction Retail pricing strategy has generated much research (see, for example, Bell and Lattin, 1998; Bolton and Shankar, 2003). It is viewed by practitioners as one of the ‘‘top five priorities in retail management’’ (Bell and Lattin, 1998). Retailers have to adopt an effective pricing strategy as part Tel.: +1 419 530 2240; fax: +1 419 530 4610.

E-mail address: [email protected] 0969-6989/$ - see front matter r 2007 Elsevier Ltd. All rights reserved. doi:10.1016/j.jretconser.2007.08.007

of their efforts to attract consumers, increase store patronage and shopping frequency, and increase quantity purchased (Blattberg et al., 1981; Krishna, 1992, 1994; Lal and Rao, 1997). The pricing strategy can be every-day low prices (EDLP) or promotional pricing—HILO (Garretson and Burton, 2003; Lal and Rao, 1997; Pechtl, 2004). Everyday low pricing strategies have become a feature of the promotional landscape (Hoch et al., 1994; Ortmeyer et al., 1991; Popkowski Leszczyc et al., 2000) and have been used by retailers to distinguish themselves from other retailers. Wal-Mart, for example, assures us that it has low prices, always, while Lowe’s, the home improvement company, currently touts its every-day low pricing strategy in a new advertising campaign. The opening vignette points to a problem that a number of retailers have been having: how to respond to the pressures of every-day low pricing used by a major retailer such as Wal-Mart (see also Duff, 2002; Howell, 2005a, b). These pressures are exacerbated in an environment where consumers are more value-conscious and are likely to search for deals (Ailawadi et al., 2001b). What happens when a retailer that utilizes HILO pricing strategies decides that, rather than having consumers shop around for deals

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at different times of the week, month, or year, it will institute an every-day low-pricing policy? To what extent is consumer response impacted by different individual factors? These kinds of questions are becoming increasingly more important as retailers struggle to determine the most efficacious policies to attract and hold consumers who patronize their stores and brands. Some prior studies on consumer responses to alterations in pricing strategies are insightful. Mulhern and Leone (1990) conducted an event study of a discrete change in a store’s price format. Their results suggested that sales increased when the store switched from EDLP to HILO. Hoch et al. (1994) investigated the impact of categorylevel price changes on sales response and found that EDLP gave a small—3% increase in units—win to manufacturers, but represented a big loss for the retailer—an 18% decrease in profits. Ailawadi et al. (2001a) investigated Procter & Gamble’s (P&G) shift to EDLP during the period 1990–1996. They compiled data from 24 categories in which P&G had a significant market share. They assessed the impact of the new pricing strategy and found that the net impact of consumer and competitor responses to the new pricing policy was a decrease in market share. This was exacerbated by increases in advertising. Were there underlying individual difference factors that accounted for this pattern of consumer response to EDLPs? With what groups of consumers might EDLPs prove effective? This article contributes to the discourse on EDLPs by investigating and reporting on the conditions under which consumers might respond differently to an EDLP strategy. The focus of the paper is on the impact of sale proneness and store loyalty (study 1), as well as income (study 2) on attitude toward EDLPs and patronage intentions for a retailer that announces a new EDLP policy. It is based on the real case of a supermarket chain that decided that it would lower prices in a number of product categories, in its efforts to retain customers. Results of the study have implications for this retailer and other marketers who often implement these strategies that they believe are in their and their consumers’ best interest. If consumers respond differently to these policies, based on individual difference factors, then it behooves retailers to take these factors into account in designing price promotional strategies to reach different groups of consumers. The paper draws on the literature on sale proneness and store loyalty to develop certain hypotheses. It then presents two studies—an experimental study and a survey—that were conducted to glean information on factors influencing consumer response to EDLPs. The results—which show that store loyalty and sale proneness are among individual difference factors and income is a demographic factor that impact consumer response to EDLPs—are presented and discussed. There is also a discussion regarding the limitations of the studies and suggestions as to areas for future research.

2. Background 2.1. Sale proneness Sales promotional activities account for a significant portion of the integrated marketing communications budget of most companies (Cox Direct, 1998). One type of price promotional activity involves price discounts or temporary price reductions. Marketing communications managers and brand managers usually have a number of objectives for price discounts and sales. They include increasing or maintaining sales, building customer loyalty or trust, encouraging brand switching, getting shelf attention, and prompting trial by new users (Burnett and Moriarty, 1998). There have been a number of studies that have indicated that many consumers respond to these types of promotional activities (Burnett and Moriarty, 1998), leading to the classification of some consumers as being more prone to certain type of promotional offers than other consumers (also see work by Lichtenstein et al., 1990, 1995; Alford and Biswas, 2002). Sale proneness, a central construct in this paper, captures the nature of consumer response to price being in sale form (Lichtenstein et al., 1993). Lichtenstein et al. (1993) define this construct as ‘‘an increased propensity to respond to a purchase offer because the sale form in which the price is presented positively affects purchase evaluations’’ (p. 235). This construct implies that there is a continuum, ranging from high to low, with high sale-prone consumers behaving differently from low sale-prone consumers, especially with respect to immediate savings from reduced prices (Blattberg and Neslin, 1990; Garretson and Burton, 2003). There have been some prior studies that have investigated the role of this construct in consumer behavior. For example, Alford and Biswas (2002) reported on a study in which they assessed the impact of discount level, price consciousness, and sale proneness on consumers’ price perception and behavioral intention. In the case of sale proneness, they hypothesized that highly sale-prone consumers would express higher perceptions of offer value and buying intentions, and lower search intention when they were exposed to a discount ad than would consumers who were low sale prone. They also predicted that sale proneness would moderate the effects of price discounts. While they found support for the predicted main effects of sale proneness, none was found for the moderating impact of sale proneness on price discounts. Nonetheless, the results attested to the fact that sale proneness does play a role in impacting consumer response to certain types of promotions. Garretson and Burton (2003), in a series of studies, discovered that high sale-prone consumers spent a larger amount on items listed in weekly sale advertisement than, and saved more than twice as much money from sales advertised in weekly fliers as, low sale-prone consumers. This information came from analyses of grocery receipts

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that were tendered by respondents in their studies. High sale-prone consumers were more price-conscious and value-conscious than low sale-prone consumers, and they were also more willing to invest in money–time trade-offs. These researchers also found that high sale-prone consumers exhibited lower levels of market skepticism than did low sale-prone consumers. Ortmeyer et al. (1991) also posited that consumers are increasingly ‘‘suspicious of retailers’ high ‘regular’ prices and their frequent ‘sales’’’ (p. 55). This could have an impact on consumer response to an EDLP policy. Might consumers perceive an EDLP policy differently, based on their levels of sale proneness? There is ample research that shows that consumers question the credibility of price promotional offers (Fry and McDougall, 1974; Gupta and Cooper, 1992; Liefeld and Heslop, 1985). In addition, various studies also indicate that consumers discount price promotions (Blair and Landon, 1981; Gupta and Cooper, 1992; Mobley et al., 1988). Why might the level of sale proneness have an impact on these attitudes and perceptions? Using an availability valence framework, Tietje (2002) demonstrated, in two studies, that an immediate reward from a product-related source enhanced product evaluations by making favorable information more accessible than unfavorable information; however, a delayed reward undermined product evaluations. In the case of EDLPs, an immediate reward will be perceived, since the retailer attests that, rather than having various promotions at different times, it will simply implement every-day low prices. Given the immediacy of the rewards from EDLP, high sale-prone consumers should respond more favorably to these policies than consumers who are low sale prone. This is the result of high sale-prone consumers being more value-conscious than consumers who are not sale prone (Garretson and Burton, 2003) and the suggestions by Tietje (2002). Also, by virtue of their disposition, high sale-prone consumers would be less likely to discount information on promotional offers than low sale-prone consumers. This presumption is derived from the fact that high sale proneness likely leads to greater experience with these offers; hence, if discounting occurs, it is likely that it will come from those who are less responsive to these kinds of offers. In addition, there is knowledge from prior research that attitudes toward price promotions influence intentions (Laroche et al., 2003). The above reasoning, backed by the results from the Tietje (2002) studies as well as findings from previous research on sale proneness (Alford and Biswas, 2002; Garretson and Burton, 2003) suggests differential responses between high sale-prone and low sale-prone consumers to a new EDLP policy. This leads to the following expectations: H1. High sale-prone consumers will respond more favorably to a new every-day low-pricing policy than will low sale-prone consumers. In particular, they will exhibit

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(a) more favorable attitudes towards an EDLP policy and (b) greater likelihood of patronage of the retailer implementing an EDLP policy than will low sale-prone consumers. 2.2. Store loyalty Store loyalty is another variable that might have an impact on consumer response to EDLP. Much of the literature on store loyalty draws on previous work on brand loyalty by Jacoby and Chestnut (1978). OdekerkenSchroder et al. (2001) defined store loyalty as ‘‘the conscious buying behavior of a consumer expressed over time with respect to one store out of a set of stores and which is driven by commitment to this store’’ (p. 311). They argued that, in the absence of commitment, ‘‘a customer is merely spuriously loyal, i.e., the behavioral response is directed by inertia’’ (p. 311). They operationalized store loyalty by means of two separate constructs, store commitment and buying behavior. They also defined store commitment as ‘‘a consumer’s enduring desire to maintain a relationship with a store’’ (p. 311) and buying behavior as ‘‘current and intended future purchase behavior of a consumer in a particular store’’ (p. 311). They posited that store commitment is important because it is likely to lead to cooperation and a reduction in the temptation of attractive short-term alternatives. They found a strong positive relationship between store commitment and buying behavior. There is also additional research that shows that the level of commitment influences behavior. Moorman et al. (1992) found that committed consumers have a higher propensity to act because of their need to remain consistent with their commitment. This paper relies on the above definitions to explain the reasons that store loyalty will likely have a differential impact on consumer response to EDLP. Bloemer and de Ruyter (1998) also provided a similar discussion regarding store loyalty and the role of store commitment in explaining store loyalty. They opined that ‘‘a consumer becomes committed to the store and, therefore, by definition becomes store loyal’’ (p. 500). They contended that consumers whose patronage is not based on store loyalty may exhibit an attachment to store attributes and can easily be lured away by competitors through efforts such as pricing strategies. They proposed a continuum of store loyalty, where, on one end you find true store loyalty (maximum store commitment), and on the other end you find spurious store loyalty (repeat visiting of the store not based on commitment; p. 500). When the level of commitment to a store is high, this is likely to cause consumers to respond negatively to information, such as EDLP, from a competing store, and, possibly, to counterargue (McDougall, 1978). This will impact attitude towards EDLPs. Marketers realize the importance of store loyalty, and many store-loyalty programs have been devised. These programs tend to keep consumers averted from what

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competitors have to offer (Davis and Young, 1994). In addition, there is prior research that shows that there are differential attitudes and behaviors between high storeloyal and low store-loyal consumers. Store loyalty has been shown to be positively associated with store brand use (Ailawadi et al., 2001b). Ailawadi et al. (2001a, b) argued that this is because store-loyal consumers trust their chosen store and become familiar with its store brands (see also Dick et al., 1995; Richardson et al., 1996). They also concluded from their study that in-store promotion users had fewer distinguishing characteristics than those who were less likely to use in-store promotions (EDLP is taken as a type of in-store promotion, since consumers have to shop at the retailer that is offering the EDLP to benefit). In the cases of attitude toward EDLP and patronage intentions, there should be differences between high store-loyal and low store-loyal consumers. Perceptions and intentions are likely to be different because of the greater store switching costs that would be incurred by high store-loyal consumers to take advantage of an EDLP (Ailawadi et al., 2001b; Bawa and Shoemaker, 1987). Based on the foregoing, the following prediction is made: H2. High store-loyal consumers will respond less favorably to a new every-day low-pricing policy of a competing retail store than will low store-loyal consumers. In particular, they will exhibit (a) less favorable attitudes towards an EDLP policy of a competing retailer and (b) lower likelihood of patronage of a competing retailer implementing an EDLP policy than will low store-loyal consumers. 2.3. Interactions The expectation is that there will be an interaction between sale proneness and store loyalty. Sale proneness suggests a likelihood of consumers shopping on the basis of the deals that they can get from sales. Store loyalty, as discussed above, suggests commitment to a particular store. Hence, high store-loyal consumers will be likely to resist the claims of competing stores, given their need to remain consistent with their commitment (Moorman et al., 1992). Research in the area of comparative advertising and the role of brand loyalty in influencing the response to comparative claims is useful here. For example, McDougall (1978) found that comparative claims were seen as more reliable and helpful by loyal users of the advertised brand than by other consumers. Users of competing brands were less receptive to the claims and viewed them with some amount of skepticism. How does this relate to EDLPs? An EDLP policy can be construed as a competing claim and, as such, generates responses from consumers. High store-loyal consumers are more likely to reject these claims, compared to low store-loyal consumers, and this is regardless of their level of sale proneness. Among low store-loyal consumers, however, the nature of sale proneness will affect responses to an EDLP policy.

Low store-loyal consumers who are highly sale prone should respond more favorably to an EDLP than low store-loyal consumers who are not highly sale prone. So, the expectation is the following: H3. The differential effect of sale proneness will be greater among low store-loyal consumers than among high storeloyal consumers. In particular, among low store-loyal consumers, high sale proneness will lead to (a) more favorable attitudes towards the EDLP policy of a competing retailer and (b) greater likelihood of patronage of a competing retailer implementing an EDLP policy than will low sale proneness. Among high store-loyal consumers, the differential effect of sale proneness will not be significant. 3. Study 1 Participants and design: Participants were 86 students (53% being men, and 47% being women; median age ¼ 21) enrolled in undergraduate classes at the Midwestern University. They completed the study in large class sessions in exchange for extra credit. They were told orally that they would be taking part in a study on promotional strategies used by different retailers. The study was a 2 (sale proneness: high versus low sale proneness)  2 (store loyalty: high versus low store loyalty) between subjects factorial design. Independent variables: As indicated above, the independent variables were sale proneness and store loyalty. In the case of sale proneness, scores on the sale proneness scale developed by Lichtenstein et al. (1995) were used to divide participants into two groups—high sale-prone consumers and low sale-prone consumers (see Appendix A for scale items). This was based on a median split. Cronbach alpha for this scale was 0.92, suggesting good reliability; the median score was 29. In recent work, involving three different samples, Garretson and Burton (2003) report reliabilities of 0.88, 0.86, and 0.90 for this scale. In the case of store loyalty, a five-item 7-point scale, consisting of agree–disagree statements, was used to measure store loyalty. These items are also reproduced in Appendix A. The coefficient alpha for this scale was 0.73, which exceeds the 0.70 recommended level (Nunnally and Bernstein, 1994). Median score on this scale was 24. See Table 2 for factor loadings for the independent variables. Dependent variables: The dependent variables were attitude toward the EDLP and store patronage intentions. These variables can serve as good indices of likely effectiveness of an EDLP strategy. Attitude toward the new EDLP policy was measured by using an amended version of an attitude scale used in previous studies (Lafferty and Goldsmith, 1999). Participants rated their attitude toward the new EDLP policy using three 7-point scales anchored by ‘‘bad/good,’’ ‘‘unfavorable/ favorable,’’ and ‘‘unappealing/appealing.’’ Alpha for this scale was 0.93. Since attitudes have been found to influence intentions (for example, Lafferty and Goldsmith, 1999),

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patronage intentions were also measured. Patronage intentions were assessed using an adapted version of a previous scale used to measure purchase intentions (for example, Kukar-Kinney and Walters, 2003; Lafferty and Goldsmith, 1999). Three 7-point scales, anchored by ‘‘very unlikely/very likely,’’ ‘‘improbable/probable,’’ and ‘‘impossible/possible’’ were used to measure this dependent variable. Participants responded to the likelihood that they would shop at this retailer if a store were set up in their area. The alpha for this scale was 0.97 (Tables 1 and 2). Stimuli: To provide consumers with information about an every-day low-pricing policy, an actual videotaped presentation by a New York-based supermarket chain was used. In the spring of 2002, this supermarket chain had sent out several thousand videotapes to consumers, announcing a new EDLP strategy. In the presentation, the CEO made the case for the EDLP strategy, and this lasted for about 4 min (refer to Appendix B for the text, which was used subsequently in study 2). Participants (students enrolled in undergraduate classes at the Midwestern University) were unfamiliar with the retail store in the videotape (a singleitem 7-point scale anchored by ‘‘not familiar’’/’’familiar’’ was used to assess familiarity), so this store would be Table 1 Coefficient alphas for independent and dependent variables Variable

Number of items

Coefficient alpha

Mean

Sale proneness (SP) Store loyalty (SL) Attitude toward EDLP policy (AttEDLP) Patronage intentions (PI)

6 5 3

0.92 0.74 0.93

28.4 23.2 15.6

3

0.97

14.2

Table 2 Factor loadings of the dependent and independent variables 1 Dependent variables: Items/factors AttEDLP1: Unfavorable/favorable AttEDLP2: Bad/good AttEDLP3: Unappealing/appealing PI1: Unlikely/likely PI2: Improbable/probable PI3: Impossible/possible Independent variables: Items/factors SP1 SP2 SP3 SP4 SP5 SP6 SL1 SL2 SL3 SL4 SL5

2

0.828 0.817 0.782 0.873 0.920 0.856

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considered to be a competitor to any store to which they were loyal. Following the presentation, participants were given a blank sheet of paper, and they were asked to provide their comments on the study so far. Following the thoughtslisting exercise, the participants completed the questionnaire from which we obtained measures of the dependent variables and the measures for sale proneness and store loyalty. To check for demand effects, participants were asked about the true purpose of the study. Examination of the responses revealed that none of the participants was aware of the hypotheses that were being tested. 3.1. Results 3.1.1. Sale proneness Results of an ANOVA, conducted to assess H1a–H3b, are presented in Table 3. H1a predicted that high saleprone consumers would exhibit more favorable attitudes towards an EDLP policy than would low sale-prone consumers. The results indicate that there was a significant main effect of sale proneness on attitude toward the new EDLP policy (F[1, 83] ¼ 6.29; po.01). High sale-prone consumers had more favorable attitudes toward the new EDLP policy (mean ¼ 16.90) than did low sale-prone consumers (mean ¼ 14.56). H1b predicted that, among high sale-prone consumers, patronage intentions for a retailer implementing an EDLP policy would be higher than among low sale-prone consumers. This hypothesis was supported (F[1, 82] ¼ 8.23; po.01). The mean for patronage intentions of high saleprone consumers was higher than the mean for patronage intentions of low sale-prone consumers (meanHigh SP ¼ 15.83; meanLow SP ¼ 12.78). 3.1.2. Store loyalty H2a predicted that high store-loyal consumers would exhibit less favorable attitudes towards an EDLP policy of a competing retailer than would low store-loyal consumers. However, there was no significant effect of this variable on attitude toward the new EDLP policy (F[1, 83] ¼ 2.67; p4.11, ns). Hence, H2a was not supported. H2b predicted that high store-loyal consumers would exhibit lower likelihood of patronage of a competing Table 3 ANOVA results from Study 1

0.832 0.752 0.795 0.828 0.925 0.904

Independent variables/ dependent variables

0.685 0.582 0.761 0.748 0.740

Between-subjects effects Sale proneness (SP) Store loyalty (SL) SP  SL interaction a

df 1 1 1

Significant at the a ¼ 0.01 level. Significant at the a ¼ 0.05 level.

b

Attitude toward EDLP policy F

Patronage intentions F

6.29a 2.67 0.39

8.23a 4.20b 0.00

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20.00

Table 4 Means and standard deviations

18.00 Patronage intentions Mean (SD)

Low store loyalty Low sale proneness High sale proneness

13.50 (5.61) 16.43 (4.56)

13.72 (5.30) 16.90 (3.55)

High store loyalty Low sale proneness High sale proneness

15.61 (2.45) 17.37 (2.73)

11.44 (6.72) 14.63 (4.04)

16.00 Sales proneness

AttEDLP Mean (SD)

14.00 12.00 10.00 8.00 6.00 4.00

retailer implementing an EDLP policy than would low store-loyal consumers. There was a significant main effect of store loyalty on patronage intentions (F[1, 82] ¼ 4.20; po0.04). High store-loyal consumers averaged lower patronage intentions (mean ¼ 13.04) than did low storeloyal consumers (mean ¼ 15.31). Thus, H2b was supported (Tables 3 and 4).

3.2. Discussion Study 1 used an experimental design to explore the impact of individual difference factors on consumer response to every-day low pricing strategies. The expectation was that there would be differential effects, including interaction effects, of sale proneness and store loyalty on consumers’ attitude toward the new EDLP policy and patronage intentions. The results indicated main effects of sale proneness on the independent variables, consistent with the expectations. High sale-prone consumers responded more favorably to EDLP, exhibiting more favorable attitudes toward the new policy and higher intentions to patronize the retailer than did low sale-prone consumers. In contrast, store loyalty had a significant effect

0.00

HSP LSL

HSL Store loyalty

Fig. 1. Plot of means: attitude toward EDLP.

18.00 16.00 14.00 Sale proneness

3.1.3. Interactions Hypothesis 3 had predicted that the differential effect of sale proneness would be greater among low store-loyal consumers than among high store-loyal consumers. It was expected that, among low store-loyal consumers, high sale proneness would have led to (a) more favorable attitudes towards the EDLP policy of a competing retailer and (b) greater likelihood of patronage of a competing retailer implementing an EDLP policy than would have been the case among low sale proneness. In contrast, among high store-loyal consumers, the differential effect of sale proneness was expected to be negligible. The ANOVA results revealed no significant interaction effects of the independent variables on the dependent variables. Hence, H3a and H3b were not supported. Figs. 1 and 2 contained the plots of means, based on planned contrasts. They reflect the absence of interaction effects. Rather, the plots suggest that, consistently, high sale-prone consumers have more favorable attitudes and intentions than do low saleprone consumers.

LSP

2.00

12.00 10.00 8.00 6.00 4.00 LSP

2.00 0.00

HSP LSL

HSL Store loyalty

Fig. 2. Plot of means: patronage intentions.

only on patronage intentions. Low store-loyal consumers indicated greater patronage intentions than did high storeloyal consumers. Store loyalty had no significant influence on attitudes toward the new EDLP policy. Notwithstanding the absence of interaction effects, the results do suggest that retail managers and brand managers need to try to understand consumer response to price promotional activities, such as EDLP strategies, by assessing individual difference factors, such as sale proneness and store loyalty. The findings also are a motivation for additional research in this intersecting area of retailing and consumer behavior.

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4. Study 2 Study 1 was primarily exploratory, used an experimental approach, and respondents were from an undergraduate student population. While this may be a good approach for theory-building purposes, the issue of external validity of the findings comes to the fore. For that reason, we decided to undertake a second study, involving a ‘real world’ consumer audience, and using a survey approach. Hence, some alterations were made to the methodology. We prepared a questionnaire where the information from the video used in Study 1 was reproduced in print form at the start of the questionnaire. Respondents were instructed to read this information, which was described as a full-page print ad that had appeared in a newspaper in the city where the company in the ad was located. We decided on this method because we believed that the perceived reality of the full-page newspaper ad would resonate with the audience in our study, in contrast to an experiment. Participants were then asked to respond to questions from which measures of the dependent variables were obtained. We also solicited demographic information, income being one variable that was obtained. We wanted to include income in our assessment in this second study, especially since it was impractical to explore that variable in the student sample that was used in the first study. In addition, we hypothesized that income would likely have an impact on consumer response to EDLP pricing strategies, since the aim of these strategies is to create value for consumers. Consumers with lower incomes are likely to respond more favorably than consumers with higher incomes to these kinds of pricing strategies. There have been recent business publications that have suggested that consumers, regardless of income levels, have been responding favorably to low-price retail formats, for example, dollar stores. According to Howell (2005a, b), in reporting on US consumers shopping at dollar stores: ‘‘Although low-income shoppers remain a core consumer group, the fastest growth segment in the niche has involved consumers in the US$70,000-plus household income bracket’’ (p. 10). Desjardins (2005) also added that though the most frequent shoppers at dollar stores were those consumers with annual income below US$20,000, ‘‘60 percent of middle-income consumers visited a dollar store in 2003, along with 49 percent of consumers who make more than US$70,000 per year’’ (p. 143). As a result, an effort was made to determine whether there were any differences in responses to EDLPs based on consumers’ income levels. Or, would all income levels respond in a similar manner to this kind of pricing strategy? A third independent variable of interest was also assessed: consumer attitude toward the retailer implementing the EDLP pricing strategy. Drawing on the previous sections above and the results of study 1, the following hypotheses regarded the impact of

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the independent variables on attitude toward an EDLP pricing strategy were tested in study 2: H4a. Sale proneness will have an impact on consumer attitude toward EDLP pricing strategies. H4b. Store loyalty will have an impact on consumer attitude toward EDLP pricing strategies. H4c. Consumer income will have an impact on consumer attitude toward EDLP pricing strategies. The following hypotheses regarding the impact of the independent variables on attitude toward a retailer implementing an EDLP strategy were tested: H5a. Sale proneness will have an impact on consumer attitude toward a retailer implementing an EDLP pricing strategy. H5b. Store loyalty will have an impact on consumer attitude toward a retailer implementing an EDLP pricing strategy. H5c. Consumer income will have an impact on consumer attitude toward a retailer implementing an EDLP pricing strategy. The following hypotheses regarding the impact of the independent variables on patronage intentions were tested: H6a. Sale proneness will have an impact on consumer intentions to patronize a retailer that implements an EDLP pricing strategy. H6b. Store loyalty will have an impact on consumer intentions to patronize a retailer that implements an EDLP pricing strategy. H6c. Consumer income will have an impact on consumer intentions to patronize a retailer that implements an EDLP pricing strategy. Participants and design: Participants were drawn from a Midwestern US city, where students enrolled in undergraduate marketing classes assisted in data collection from adult non-student consumers. The survey instrument was discussed with students in class settings, and each student was asked to collect data from six consumers, two each in different age cohorts. These persons should not be students or staff of the University. Such a method of using students to gather data from non-student populations has been used before with success (see, for example, Goldsmith et al., 2000; Clark and Goldsmith, 2005; Jamal et al., 2006). After eliminating respondents who failed to complete a number of items, we were left with 181 usable questionnaires. Table 5 contains information on the demographic profile of the participants. Independent variables: Among the items on the questionnaire were items that measured sale proneness as well as store loyalty. These items were the same as those used in Study 1. In addition, there were a number of demographic items, among them being income level, mentioned earlier.

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Table 5 Demographic profile of respondents in Study 2 Demographic variables

Frequency

Table 6 Coefficient alphas for multiple-item measures in Study 2 Percentage

Variable

Number of items

Coefficient alpha

Mean

Sale proneness (SP) Store loyalty (SL) Attitude toward EDLP policy (AttEDLP) Attitude toward the retailer (AttRET) Patronage intentions (PI)

6 5 3

0.89 0.78 0.95

27.4 24.7 15.4

3

0.95

15.4

3

0.95

14.9

Gender Female Male

95 84

52.5 46.4

Age 18–22 years 23–28 years 29–44 years 45–54 years 55 years and above

10 53 43 47 23

5.5 29.3 23.8 26.0 12.7

10 9 8 129 5 1 19

5.5 5.0 4.4 71.3 2.8 0.6 10.5

Education Did not finish high school High school diploma Technical school diploma Some college College graduate Graduate school Other

4 28 10 44 72 21 2

2.2 15.5 5.5 24.3 39.8 11.6 1.1

Income levels Below $15,000 $15,001–$24,999 $25,000–$39,999 $40,000–$49,999 $50,000 and above Missing

19 37 31 17 69 8

10.5 20.4 17.1 9.4 38.1 4.4

125 28 8 3 9 6 2

69.1 15.5 4.4 1.7 5.0 3.3 1.1

Race African American Arab American Asian American Caucasian American Hispanic American Native American Other/self-description

Employment Full time Part-time Retired Homemaker Student Temporarily unemployed Unemployed never held job

Dependent variables: Attitude toward the EDLP policy and intentions to patronize the retailer were measured using the same items used in study 1. Attitude toward the retail chain was assessed by asking the consumers to use a 3-item scale (Unfavorable/Favorable; Bad/Good; Negative/Positive; 7-point) to rate their overall reaction to the retail chain mentioned in the full-page ad. Cronbach alpha for this variable was 0.95. 4.1. Results 4.1.1. Preliminary analysis Reliabilities of the multiple-item measures used in this study were determined using coefficient alpha. Table 6

Table 7 Effects of sale proneness, store loyalty, and income on EDLP attitude Variable

B

Beta

t-Value

Sale proneness Store loyalty Income level

0.219 0.167 0.483

0.260 0.151 0.106

3.624a 2.114b 1.475

Notes: R2 ¼ 0.100; Adjusted R2 ¼ 0.085. Test of the full model: F(3, 177) ¼ 6.57, po0.001. a po0.001 b po0.05

provides information on these reliabilities, which appear fairly similar to those in Study 1. The constructs also satisfied the Nunnally and Bernstein (1994) reliability criterion of 0.70. 4.1.2. Tests of hypotheses To test hypotheses H4a through H6c, a series of multiple regression analyses was performed using SPSS12. Each dependent variable was regressed on the independent variables: sale proneness, store loyalty, and income level. Table 7 contains information on the results for the regression of attitude toward the EDLP on the three independent variables. The results show that the overall model was statistically significant (F(3, 177) ¼ 6.57, po0.001). The table also contains information on the unstandardized regression coefficients (B); the standardized regression coefficients (Beta), R2, and the t-values. Significant regression coefficients were obtained for sale proneness (po0.001) and store loyalty (po0.05). Notably, the regression coefficient for sale proneness was highly significant. Income level was not significant. Taken together, these results provide support for H4a, which predicted an impact of sale proneness on consumer attitude toward EDLP pricing strategies, and H4b, which contended that store loyalty would have an impact on attitude toward EDLP pricing strategies. However, H4c, which predicted an impact based on income level was not supported. A similar multiple regression analysis was performed to test H5a–H5c: regressing attitude toward the retailer on the independent variables. Those results are presented in

ARTICLE IN PRESS A.A. Bailey / Journal of Retailing and Consumer Services 15 (2008) 211–223 Table 8 Effects of sale proneness, store loyalty, and income on attitude toward the retailer Variable

B

Beta

t-Value

Sale proneness Store loyalty Income level

0.131 0.126 0.451

0.221 0.162 0.141

3.058a 2.248b 1.947b

Notes: R2 ¼ 0.093; Adjusted R2 ¼ 0.078. Test of the full model: F(3, 177) ¼ 6.05, po0.001. a po0.01. b po0.05.

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Table 10 Results of tests of hypotheses: Study 2 Hypotheses

Hypothesized relationship

Outcome

H4a H4b H4c H5a H5b H5c H6a H6b H6c

Impact Impact Impact Impact Impact Impact Impact Impact Impact

Supported Supported Not supported Supported Supported Supported Supported Not supported Supported

of of of of of of of of of

sale proneness on AttEDLP store loyalty on AttEDLP income level on AttEDLP sale proneness on AttRET store loyalty on AttRET income level on AttRET sale proneness on PI store loyalty on PI income level on PI

Note: AttEDLP ¼ Attitude toward EDLP; AttRET ¼ Attitude toward the retailer; PI ¼ Patronage intentions. Table 9 Effects of sale proneness, store loyalty, and income on retailer patronage intentions Variable

B

Beta

t-Value

Sale proneness Store loyalty Income level

0.191 0.038 0.658

0.315 0.047 0.201

4.452a 0.672 2.831b

Notes: R2 ¼ 0.129; Adjusted R2 ¼ 0.114. Test of the full model: F(3, 177) ¼ 8.73, po0.001. a po0.001. b po0.01.

Table 8. The overall model was statistically significant (F(3, 177) ¼ 6.05, po0.001). Table 8 also contains similar outputs as those in Table 7. In the case of attitude toward the retailer, significant regression coefficients were obtained for all the independent variables: sale proneness (po0.01); store loyalty (po0.05); and income level (po0.05). These results provide support for Hypotheses H5a–H5c, which predicted effects of the independent variables on attitude toward a retailer implementing an EDLP pricing strategy. Hypotheses H6a–H6c were tested by regressing patronage intentions on the independent variables. The results in Table 9 indicate that the full model was statistically significant (F(3, 177) ¼ 8.73, po0.001). Significant regression coefficients were obtained for sale proneness (po0.001) and income level (po0.01). As with the case regarding the impact of sale proneness on attitude toward the EDLP, the regression coefficient for sale proneness in this case was highly significant. Store loyalty did not have a significant impact on patronage intentions. H6a and H6c were supported, but not H6b. Refer to Table 10 for summary information regarding the outcome of the tests of the hypotheses in Study 2. 4.2. Discussion Study 2 was undertaken to build on Study 1, employing a survey approach and adding variables to the analyses. A number of predictions regarding the relationships among the three independent variables and dependent variables

were made and tested. Support was found for all but two of the 9 hypotheses. In the first set of hypotheses, we expected that there would be a relationship between attitude toward an EDLP policy and the independent measures: sale proneness, store loyalty, and income level. Given the nature of sale proneness, which disposes consumers to seek out sales benefits, we expected that saleprone consumers would respond more favorably to an EDLP policy than would less sale-prone consumers. We also expected store loyalty to act in a manner to minimize the impact of an EDLP on consumers’ attitudes, with consumers who are loyal to another store being less responsive to an EDLP announcement by a competitor. In addition, we expected that a consumer’s income level would have an impact on response to an EDLP. While support was found for a link between sale proneness and attitude toward an EDLP and store loyalty and attitude toward an EDLP, no link was established between income and EDLP. This was surprising, given the spread in income levels in our sample. The relationship was expected because higher income consumers were expected to be less price sensitive and, consequently, less responsive to EDLPs. However, these results may establish support for the fact that consumers, regardless of income levels, like to shop around for deals. Evidence of this growing search for deals among US consumers has driven the growth in such sectors as dollar stores, retail stores that offer extremely cheap products, most for about US$1 (see, for example, Zimmerman, 2004). Zimmerman (2004) reported that, according to the largest US dollar-store chain, households with income levels of more than US$50,000 were its fastest growing market, though the dollar-store sector relied primarily on low-income households for the majority of its sales. See also Desjardins (2005) and Howell (2005a, b) for similar arguments. The study found strong links between the independent variables and attitude toward the retailer implementing the EDLP. Consumers reacted differently towards the retailer based on whether they were highly sale prone versus lowly sale prone, and whether they were highly store loyal versus lowly store loyal. In addition, the regression coefficient for

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income level was significant. In the case of patronage intentions, this variable was related to sale proneness and income level, but not to store loyalty. Taken together, the results from study 2 indicate that marketers, in implementing EDLP policies, have to be mindful of individual differences, such as levels of sale proneness and store loyalty, which might drive consumer attitudes and intentions. 5. General discussion The studies related to the announcement of a new EDLP policy by an actual retailer and gauged the impact of store loyalty and sale proneness (in the first study), along with income levels (introduced in the survey) on consumer response to this announcement. This was against the background of the retailer having sent out a videotaped message to consumers announcing this new policy. Consumers who were unfamiliar with this retailer were used in these studies. These studies were undertaken in an effort to add to the growing body of knowledge on consumer response to EDLPs, which policies have become particularly attractive to many US retailers. The results on the effect of sale proneness add to the body of literature regarding differential responses of consumers to price promotional strategies based on their level of sale proneness (see also Alford and Biswas, 2002). They underscore the importance of factoring in individual difference factors in the analysis of consumer response to various price promotional activities. The studies also fill a void in our understanding of how consumers respond to various price promotions, given that they looked at the under-utilized individual difference of sale proneness and its impact on consumer responses. The studies sought to establish whether this factor can work/does work in tandem with a factor such as level of store loyalty to influence consumer response to price promotions such as EDLP policies. There are some managerial implications emanating from these studies. Marketers can use sale proneness as a segmentation variable when they implement EDLP strategies. Retailers are armed these days with a wealth of information on the shopping patterns of their customers, and profiles of these customers can be developed. Included in those profiles would be information on their sale proneness. Store loyalty is also an obvious segmentation variable that should be attended to. Appropriate targets for EDLPs include consumers who are highly sale prone, since they respond differently than low sale-prone consumers to EDLPs. In study 1, high store-loyal consumers were no different than low store-loyal consumers where attitude toward the EDLP was concerned. However, they differed on patronage intentions. In study 2, there was not a significant relationship between store loyalty and patronage intentions. It seems, therefore, that retailers may have to use other marketing communication tools, in conjunction with EDLPs, to attract store-loyal consumers, since

favorable perceptions of and attitude toward EDLPs among these consumers might not always translate into patronage intentions. The policy that was implemented by this retailer can be easily replicated by competitors, especially in a sector that is as highly competitive as the one in which this retailer operates. The opening vignette attests to the fact that a number of retailers have been following the example of Wal-Mart, offering low prices, every day. As Adamy (2005) notes, consumers have been conditioned to expect low prices, and they respond to retailers that offer them. Consumers may be attracted initially to the retailer as a result of the implementation of a new EDLP policy, but the retailer has to ensure that it combines this with other elements to ensure that gains from this new policy are sustainable. Merchandise quality and assortment may be important, since sometimes consumers associate low prices with low quality merchandise. They may also associate low prices with poor or no customer service. Hence, retailers offering EDLPs need to take this account in fine-tuning their retailing strategy. 6. Limitations and future research The results in both studies are based on the experience of one retailer, from one part of the US, and participants in the study were from another part of the country. Though the findings from the second study lend credence to those established in the first study, caution is prescribed when it comes to generalizing the results to other retailers and other geographic areas. However, efforts could be made to replicate these studies with other audiences and with other kinds of retailers other than supermarket chains. These could include home improvement stores and mass merchandise stores. Another concern is that attention was limited to consumers’ perceptions of the new EDLP policy. Hence, no attention was paid to actual behavioral responses to the EDLP policy. Whether behavior is consistent with attitudes in the case of EDLP is worthy of research. Attention was also confined to a retailer with whom participants were unfamiliar. The impact of the level of store familiarity on consumer response to EDLP presents scope for additional research. The study reported here was cross-sectional. The experience of Procter & Gamble suggests that, over time, there could be erosion in the effects of sale proneness on consumer response to EDLP (see Ailawadi et al., 2001a, b). Longitudinal studies would be appropriate to assess whether there is erosion in sale proneness effects over time. Among other areas for future research would be the determination of the differential response of current consumers of the retailer and non-customers of the retailer. Hoch et al. (1994) refer to the first group as the installed base of the retailer, while non-customers represent potential opportunity. The participants in our study were noncustomers. Whether current consumers of a retail chain would respond differently to a new EDLP policy than

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would non-customers is worthy of investigation. Ailawadi et al. (2001a, b), in assessing value-conscious behavior toward store brands and national brands, discovered that there were four well-defined and identifiable consumer segments. These were: deal-focused consumers, store brand-focused consumers, deal and store brand users, and non-users of both store brands and national brands. These segments may respond differently to EDLPS, so this could form the basis for research. Another research issue might be the extent to which EDLP, supported by additional marketing communications tools, might be effective in attracting shoppers from competing retail stores. Obviously, an EDLP by itself might not cause shoppers at competing stores to switch to a store implementing an EDLP. The advent and mushrooming of dollar stores will likely have implications for the success of EDLP by some retailers. The impact of access to these types of retailers on consumer response to EDLP by major chain stores should be researched. The effectiveness of category-level EDLP (only certain product categories within the store are subject to EDLP) versus chain-wide EDLP also warrants research. There are also additional individual difference factors and situational factors that could form the basis for research. For example, consumer skepticism is an individual difference factor that could impact response to EDLP, given claims by Ortmeyer et al. (1991) that consumers are increasingly ‘‘suspicious of retailers’ high ‘regular’ prices and their frequent ‘sales’’’ (p. 55). The moderating roles of consumer skepticism, price consciousness, consumer need for cognition, and deal proneness can form the bases for research, as might other contextual factors such as store image, store reputation, level of consumer familiarity with the retailer, and consumers’ prior perceptions of a retail chain. In addition, study 2 looked at only one demographic variable, and other demographic variables, for example, household size, might be considered in future research. It would be also interesting to conduct research using longitudinal data from the retailer that implemented the EDLP policy to determine the relative efficacy of this strategy for that retailer.

the amounts they do on price promotional deals, so long will an interest in understanding consumer response to these kinds of promotions persist. Appendix A A.1. Sale proneness scale items SP1. If a product is on sale, that can be a reason for me to buy it. SP2. When I buy a brand that’s on sale, I feel that I am getting a good deal. SP3. I have favorite brands, but most of the time I buy the brand that’s on sale. SP4. One should try to buy the brand that is on sale. SP5. I am more likely to buy brands that are on sale. SP6. Compared to most people, I am more likely to buy brands that are on special. A.2. Store-loyalty scale items SL1. When I shop for groceries, I usually shop at the same store. SL2.1 I am the kind of consumer who shops for groceries at many different stores. SL3. For me, it is true that, ‘‘There is one grocery store at which I shop the most.’’ SL4. To me, the store at which I grocery shop is the best grocery store chain. SL5. I prefer the store at which I shop for groceries over all the other grocery stores. Appendix B B.1. Portion of text of videotape by CEO of (store name) Supermarket Why do we all want to simplify today?y At (store name), we’ve been committed to helping you make great meals easy. We’ve tried to be a source of new recipes with chefs and many others to help you be successful with these meals. The more we thought about it, the more we were convinced that this was not enough. If we truly wanted to simply your life, we should have a pricing program that would enable you to buy what you wanted when you wanted it. Our prices would be fair and consistent. We decided to try a different pricing approach with a few product categories. We certainly wanted to know if you, our customers, liked the ideay

7. Conclusions The impact of sale proneness and store loyalty is a useful area for investigation for a number of reasons. In the case of sale proneness, these results and others (for example, Alford and Biswas, 2002) have shown that, given differences in responses to price promotions, different marketing strategies can be developed to target consumers based on this construct. In addition, retailers also have to take into account the possible confounding impact of a variable such as store loyalty on consumer perceptions of the promotional offers that they make. Demographic factors are also likely to impact how consumers respond to EDLP. As long as retailers, brand managers, and marketing communications managers continue to expend

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In these product categories, we used to charge a regular price and run a sale on these items about four times a year. However, at (store name) we are customers, too, so we started to think whether this was how people like to shop. What if you missed the sale? What if you were out 1

This item was reverse coded.

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