E-commerce Pricing Strategies Adapted for the Chinese Market

HILO and EDLP pricing strategies help create a low-price image for consumers.

HILO: High marketing costs, creating a low-price image through high-low price comparison

The core of the high-low (HILO) pricing strategy is to create a strong contrast by comparing high prices with low prices, so as to strengthen the low-price image of the brand or merchant and stimulate consumer purchasing behavior.

The HILO pricing strategy can be applied in two ways: First, it applies across time, using short-term price reductions to encourage consumers to experience a price comparison. The most crucial aspect of this strategy is the price reduction. By offering consumers a short-term discount, consumers feel a sense of urgency and enticement to purchase, thereby generating higher sales revenue during the promotional period. Second, it applies across categories, selecting categories with the same or higher pricing as other merchants while maintaining a significant price advantage in other discounted categories. This strategy then attracts traffic with a small number of discounted categories, driving sales in other normally priced categories.

The HILO pricing strategy is characterized by short-term price cuts and strong promotional impact, which in turn leads to high marketing costs, demanding inventory requirements, and significant peak delivery pressure. Among Chinese e-commerce platforms, Alibaba and JD.com's annual promotions are typical examples of the HILO pricing strategy, generating traffic and GMV far exceeding their daily average. Double 11 and the 618 shopping festivals are key promotional events for major e-commerce platforms. JD.com's sales expense ratio clearly reflects the higher marketing expenditures in Q2 and Q4 of each year. The shift from a single-day sales event to two rounds of pre-sales during Double 11 reveals that pre-sales can better help merchants prepare inventory and alleviate peak delivery pressure.

Carrefour is a prime example of offline retail using the HILO pricing strategy, combining both time and category dimensions. On the one hand, Carrefour features 10% low-priced merchandise, which drives sales of the remaining 90% of regular-priced merchandise. These low-priced items primarily include daily cosmetics and food and beverages, such as cooking oil, rice, and flour, which have low profit margins but are purchased frequently and in high volumes. Carrefour typically sells these low-priced items at 10%-20% below the purchase cost. Furthermore, during store anniversaries and holidays, Carrefour offers special discounts to stimulate customer spending.

The HILO strategy may be more suitable for high-priced categories, national brands, and new product launches (when historical sales figures are unavailable). Research has found that stores using the HILO pricing strategy have relatively high average prices and low average purchase quantities. In terms of brand characteristics, the HILO strategy is more suitable for national brands, while the EDLP strategy is more suitable for private labels. For brands, predicting the optimal price for maximizing profits when launching a new product is difficult. The HILO strategy starts with a relatively high price and gradually reduces it with each new version. For example, in the mobile phone category, new phones are typically sold at a relatively high original price, while older versions are sold at a lower price. The HILO strategy is also suitable for destocking high-inventory items and for seasonal promotions during the transition period.

EDLP: Low cost and low fees, the essence is the pursuit of operational efficiency

The core of the "Every Day Low Price" (EDLP) strategy is to sell all items at low prices, rather than periodically or on a limited number of items. The EDLP strategy maintains low prices over the long term, eliminating the uncertainty of price fluctuations. EDLP originated in the United States in the 20th century and was widely used by discount stores. Kmart was the first discount retailer to adopt the EDLP strategy, opening its first discount store in 1925. In the early 1980s, Walmart implemented the EDLP strategy, requiring its stores to sell all items at low prices every day. Warehouse clubs like Sam's Club and Costco soon followed suit, adopting a limited-assortment EDLP pricing strategy. Non-retail industries such as airlines (Southwest) and automakers (Saturn) also adopted the EDLP strategy. After 2000, some Chinese retailers, including e-commerce platforms like Suning.com and Pinduoduo, and supermarket chains like Yonghui Superstores (warehouse stores), began adopting the EDLP strategy. With the development of the retail industry, consulting firm DJL Research believes that the true meaning of everyday low prices is not the lowest price in the market, but a price that is lower than the market average and relatively fair.

EDLP is characterized by consistently low prices. These truly low prices do not come entirely from concessions made by merchants, but rather reflect the ultimate pursuit of operational efficiency. The EDLP strategy reduces gross profit margins, but reduces excessive marketing investment through efficient logistics, supply chain management, and the branding effect of "low prices." Efficient operations enable companies to achieve better inventory turnover and expense ratios, thereby realizing scaled profits. Walmart is a typical example of the EDLP strategy, advocating a business philosophy of low cost, low expense structure, low prices, and profit sharing for customers. Since 1993, Walmart has been focusing on its own brand, "Hui Yi." The development of its own brand has helped increase gross profit margins while maintaining price advantages.

EDLP is suitable for scenarios where consumers understand product prices, can quickly determine whether EDLP prices are reasonable, and make decisions. This strategy primarily targets standard items and daily necessities. Trendy items are not suitable for EDLP strategies. Stable traffic is crucial for EDLP stores. Stores must maintain a necessary turnover rate and stable sales to reassure suppliers. This, in turn, relies on ensuring that recurring items satisfy consumers.

Strategic transformation: corresponding to the process of consumer education and adjustment of staff structure

The transition costs between an EDLP strategy and a HILO strategy primarily include consumer education, overcoming managerial resistance to change, and restructuring the distribution of benefits and collaboration models within the supply chain. Among these, the cost of consumer re-education presents the greatest risk in this transition. While a price image can attract a steady stream of customers, establishing and solidifying this image takes time , and it also takes time for consumers to gradually accept, adapt to, and internalize this price image. The article "High-Low Pricing (HL) vs. Every Day Low Pricing (EDLP) Strategy: The Consequence of JC Penney 's Move from HL to EDLP, 2017" analyzes JC Penney's shift from a HILO to an EDLP pricing strategy. The article found that consumers did not accept the change in strategy and still perceived JC Penney as a mid-priced department store, leading to a decline in JC Penney's performance after the transition.

The convenience of price comparison in e-commerce makes the EDLP strategy more easily perceived by consumers. In offline consumption scenarios, when consumers do not compare prices across stores simultaneously, they tend to use the prices of different product categories within a store as a reference point. This shift makes the advantages of deep pricing strategies (i.e., strategies with significant price advantages on a small number of products, similar to HILO) easier to identify and evaluate than those of frequent pricing strategies (i.e., strategies with smaller price advantages on many products, similar to EDLP). In offline scenarios, stores that adopt a HILO pricing strategy may display a lower price image than those that adopt an EDLP pricing strategy. Compared to offline channels, consumers on e-commerce platforms can more easily compare product prices across different platforms. The low-price image created by EDLP is more easily perceived by consumers than in offline channels.

China's e-commerce: Price subsidies as a means to compete for traffic

JD.com: Hundreds of billions in subsidies focus on strong categories, and long-term enrichment of product pools supports low-price supply

JD.com's 10 billion yuan subsidy program fully launched at 8 PM on March 6 , 2023 , and the company also shifted from a high-end (HILO) pricing strategy to an end-to-end (EDLP) pricing strategy. Regarding price comparison monitoring, JD.com publicly announced its "double compensation for overpriced purchases" service rules on February 21st, directly targeting prices on platforms like Pinduoduo's 10 billion yuan subsidy program and Tmall. This program applies to third-party merchants opening stores on JD.com, excluding JD.com's small stores. The 10 billion yuan subsidy program covers twelve categories, with home appliances, mobile phones, and household items being the key categories based on the number of SKUs. This allows consumers to better understand the prices of standard products and more easily judge whether a price is attractive. In terms of discounts , most 3C appliances are discounted between 20 % and 90%. The median price of computers and mobile phones after subsidies is approximately 2,000 RMB . Initially, subsidies for 3C appliances may serve a more defensive purpose, aiming to attract high-quality consumers in high-tier cities who were attracted by Pinduoduo's 10 billion yuan subsidy program.

Price competition is a means to achieve success, but the essence is a competition for traffic. From a user perspective, JD.com has greater potential for user growth than Taobao and Pinduoduo. The 10 billion yuan in subsidies may help the platform attract more price-sensitive consumers and expand its user base. Sustained and stable traffic and conversions are essential to attracting more low-priced goods. Future low-priced goods may come more from point-of-sale (POP) merchants. Initially, the platform's incentives to attract POP merchants by offering commissions and traffic support may result in lower monetization rates and higher sales expenses. This is primarily because JD.com, as a channel partner for brands, has an obligation to maintain the stability of brand pricing. Excessive subsidies could impact partnerships with brands. Furthermore, strong, standard brands have strong bargaining power, and subsidies may need to be borne by the platform. For example, large-volume products like Moutai face inventory constraints, making it difficult to generate stable traffic over the long term. Therefore, the product pool of POP merchants can more effectively supplement the supply of low-priced goods. In January 2023, JD.com launched a new program offering a fast entry channel, a 90 -day free trial run, and a 10-minute store opening. Multiple concessions on technical service fees and platform usage fees were offered to attract merchants and further enhance the merchant ecosystem. By the end of 2022, the number of POP merchants had maintained growth of over 20% for eight consecutive quarters.

The essence of retail is a competition of efficiency. Whether a low-price strategy can consistently generate scalable profits is a long-term test of operational capabilities and efficiency. Ensuring stable, high traffic and conversion rates in subsidized channels is crucial for attracting more merchants to join the low-price, low-profit model. JD.com's cost-cutting and efficiency-enhancing efforts in 2022 showed quarterly improvement in expense ratios from Q1 to Q3, continuous improvement in operational efficiency, and quarterly increases in non-GAAP profit margins. JD.com invested 1 billion yuan in the first month of its 10 billion yuan subsidy program, and future investment budgets will be adjusted based on actual business conditions.

Pinduoduo: Traffic continues to increase with billions of yuan in subsidies, with 3C appliances as the main categories

The significance of the 10 billion yuan subsidy to Pinduoduo lies in the expansion of users and the increase in ARPU. Pinduoduo launched the 10 billion yuan subsidy plan on the eve of 618 in 2019, implementing large subsidies with no limit on quantity and time for brand products, and has been adhering to it as a long-term strategy to this day. Its 10 billion yuan subsidy has been increasing continuously and reached its peak in November 202. Although the subsidy intensity of Pinduoduo in early 2023 was lower than that at the end of 2022 , it has increased significantly compared with the same period. The MAU of the entrance of Pinduoduo's 10 billion yuan subsidy has been growing steadily. In terms of categories, since the second half of 2022, Pinduoduo's 10 billion yuan subsidy categories have tilted towards 3C digital products and electrical appliances, especially mobile phones and large appliances, which have a high degree of overlap with JD.com's main business categories.

Alibaba: The 2023 strategy emphasizes pricing power and the long-term pursuit of technological and business innovation.

Price power is one of Alibaba's five major strategies for 2023. Alibaba's management recently determined Taobao's five major strategies for 2023, namely live streaming, private domain, content-based, local retail and price power. Taobao's main business direction in 2022 is "from transaction to consumption", and this direction will continue in 2023 to further improve Taobao's user experience and customer value. Among them, price power mainly refers to improving the cost-effectiveness of goods, including the design of market mechanisms, various marketing products, Taobao special agricultural products, and breakthroughs in the business model of direct-to-consumer factory goods. After the release of Alibaba's Q3 financial report, Alibaba CEO said in a conference call that "price subsidies are not new. No company can achieve the goal of changing the situation through its own continuous price subsidies. Ultimately, changing the situation still depends on technological innovation and innovation in business mechanisms." This also reflects the attitude and views of Alibaba's senior management on price subsidies.

JuHuaSuan, targeting lower-tier markets and university students, is gradually transforming into a platform for brands to create explosive daily sales. Alibaba established the JuHuaSuan business unit in 2010. Unlike Pinduoduo's 10 billion yuan subsidy program, JuHuaSuan's 10 billion yuan subsidy program targets users in third- and fourth-tier cities, while Pinduoduo's targeted users in first- and second-tier cities. JuHuaSuan's 10 billion yuan subsidy program invested 1 billion yuan in university students, targeting this demographic with hot topics, short video livestreams, and other initiatives to ignite popular categories. JuHuaSuan's 2021 goals include reaching 80% of the university population, approximately 32 million people, bringing more young consumers to merchants. In terms of brand marketing, JuHuaSuan is positioned as a platform for all brands to achieve explosive daily sales. JuHuaSuan has simplified many rules and improved cooperation mechanisms, supporting merchants who offer high-quality products at reasonable prices with traffic and gameplay, creating new opportunities for more small and medium-sized businesses. The average customer spending on JuHuaSuan was approximately RMB 250 in January and February 2023 , reaching a peak of approximately RMB 350 during Singles' Day in 2022. In 2022, the average monthly number of participating SKUs was approximately 670,000, with approximately 6,500 participating merchants.

Under extreme price competition, the short-term focus is on traffic, the medium-term focus is on efficiency, and the long-term focus is on supply.

In the early stages of a low-price strategy, greater attention should be paid to traffic activation; in the mid-term, focus on improving operational efficiency; and in the long-term, ensure that the product diversity on the supply side meets consumer demand, driving significant sales growth and achieving scaled profits. In the early stages of a low-price strategy, companies should prioritize user activation, adjusting traffic distribution rules, and defending core categories. Regarding traffic activation, key metrics such as MAU, DAU, ARPU, engagement between new and existing users, and conversion rates of users accessing subsidy portals can be used to assess the success of the strategy. Regarding core category defense, the effectiveness of subsidies for core categories can be assessed by the number of SKUs, discount levels, GMV growth, and market share. In the mid-term, when users have already gained some awareness of the low-price strategy, companies should prioritize improving operational efficiency and fostering a low-price mindset. Improved operational efficiency can be reflected through changes in gross profit margin, subsidy allocation, and cost controls, such as sales expenses. In the long term, the implementation of a low-price strategy requires support from a rich supply chain, while also achieving scaled profits through the low-price strategy. On the supply side, product richness is reflected by the number of partner brands, the number of SKUs, and the performance of POP merchants. On the demand side, the proportion of 10 billion yuan in subsidies to the platform's GMV, the platform's market share, and the net profit margin are used to determine whether the strategy can achieve scaled profits.