Waitrose – Price Elasticity of Demand

Waitrose – part of the John Lewis partnership – has branded itself among the high-end food shoppers, who expect to pay more for better quality, which is a good indication of a strong relationship between a firm and their customers. Despite this, Waitrose launched an Essentials Range that comprised of value food products – for example, they offer over 1,400 everyday food items at a discounted price. However, in order for revenue to be increased – as this is a product development revision of their existing marketing mix  – while prices are decreased, sales volume needs to grow by a greater proportion: this is Price Elasticity of Demand (PED)

A positive PED was needed; Waitrose hoped that the decrease in price would be more than compensated by an increase in sales volume so that overall revenue would increase. Perhaps some what luckily, the marketing effort was implemented swiftly, despite a slow organisational structure, to be ready before the impact of the recession. Clearly, therefore, responsiveness can be essential in marketing – moreover, considering the high number of substitutes and strength of customers’ buying power in the supermarket industry. As a result of perfect economic timing, sales value was over £100 million thanks to the rebranding; this meant that the volume increase required to break-even on the £25 million cost of the price reduction of 5% was exceeded by a huge 17%. A clearly successful strategy, that has given Waitrose a new-found financial strength and compounded its marketing competitive advantages: their market share has risen to 4.1%.

However, if this strategy is so successful, why do not all firms reduce prices to increase sales? Well, if the PED is negative then overall sales revenue will decline if a price is lowered (and increase if the price rises): the price drop has got to make people want to buy the product more. Although, reducing the price of milk is highly unlikely to encourage greater consumption – a tactic to implement a market penetration strategy – it can detract customers from competitors, as is the case with Waitrose. But there remains one more risk with this launching a budget/essential product range: damage to reputation. Given their strong customer relations, Waitrose to some extent relied on customers purchasing from them just for their image, which was emphasised by expensive products. However, by stressing that the premium taste has not been lost from their food – British farmers, animal care standards and quality assurance – middle-class Mums still feel classy doing their weekly shop. This highlights the importance of communicating a firm’s values and ethos, even if it is for marketing purposes and not for ethical reasons.

© Joshua Blatchford author of Manifested Marketing 06/09/2010

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