We are very sure about this so any views to the contrary will be appreciated.
A leading mobile phone company launched a campaign today allowing consumers to purchase its phones in 3 equal monthly installments.
This is a leading company under attack in India from low cost phones in the mass market as well as the 'smart phone' segments.
This campaign surprised Ritu and me immensely.
Installments plans , particularly in an emerging economy, should only be used to develop a product category. And when they are used, the installments should be such that they at least equal the current alternative.
We explain:
Eg: House-ownership: It is expensive and house ownership in urban India is very low. So an EMI from banks (over 10 or 20 years) allows people to enter this category and the size of the (monthly payment) EMI usually is equal to the monthly rent paid out anyway. So the offer of home ownership is very attractive.
For mobile phones, this does not work. India has 600 mn mobile phones (estimated). So the category exists.
For a premium brand to use 3 monthly installments to bring the cost (per month) to that of the full cost of a low price competitor - this is not logical. A premium player approaching its target audience on price is a sure sign of panic.
If i cannot afford a premium product in a single payment, very very unlikely i will be able to afford it in 3 payment plans....or very unlikely i will still not be distracted by a competitor model at one third the price- with mostly all comparable features.
The campaign needs to be re-looked asap.
Ritu and Venkat
Showing posts with label pricing. Show all posts
Showing posts with label pricing. Show all posts
Friday, 2 July 2010
Sunday, 5 July 2009
an essay on recent pricing trends in india
Income growth estimates 2003-2007:
Given a lack of recent public statistics on income and income growth, we used newspaper reports and other estimates to paint a picture on the income segmentation in India in 2003 and its evolution in the period 2003-2007.
Table 1.1:
Number -------Annual inc(INR)----Average----Grth%(03-07)--Income 07----Inc grth% 08
of HH
4,000,000 ----->215,000 ---------215,000 -----25%---------524,902---------10%
90,000,000-----45,000-215,000----130,000 -----15%----------27,371----------8%
66,000,000------< 45,000----------22,000-- ----6%----------28,405----------6%
Table 1.2:
Average Inflation in the period 2003-2007 ----5%
Inflation 2008 -------------12%
Inflation 2009 -------------------1%
1 USD= 48 Indian Rupees (INR)
Given that the Indian economy grew between 7-9% in this period, these household income growths were not seen to be irregular. Income growths in the period 2003-2007 were significantly higher across all income segments, compared to inflation in the same period.
Note that salary growth rate fell in 2008 while inflation rose spectacularly (refer table 1.1)
Income growth in 2003-2007 must be seen in the context of supply and demand. While the Indian economy grew at break neck speed, the number of well educated graduates and competent managers was restrained by the lack of growth of high quality educational institutes. This resulted in high rates of turnover in companies, sky rocketing salaries and an overall increase in employment. In-fact this period also saw a large migration of people having very basic educational qualifications (grade 8 pass) moving from villages to cities where booming sectors such as retail were offering entry level jobs to people with modest education.
This means that apart from the 66 Mn households at the bottom of the pyramid, all other households were earning far more than inflation. This is a very big difference w.r.t. Western economies where salary increases are very closely tied to inflation. The savings rate in India increased from 27% in 2003 to 36% in 2008.
The period 2003-2007 was giving most Indian households real income growths in excess of 10%, taking into account inflation, and a lot of extra savings was being created
This is one of the reasons we wrote in 2008, that high inflation of 12% in 2008 was unlikely to impact the common man. Contrary to common opinion held in India that Indians would take to the streets to protest high prices, we maintained that “middle class” India had received a huge buffer in terms of salary increases since 2003 and would be able to withstand inflation of 12% in 2008. We maintained that if salaries rises were to reduce, the middle class would still be able to survive 12% inflation into 2009. But that inflation would need to fall in 2009 to 5% or lower.
The bottom most segment of 66 Mn households is agriculture dependent. This segment consumes what it produces and then sells to the market its excess. In a high inflation period, our understanding is that this segment is insulated from increasing prices of cereals and staples, since they themselves are the producers.
So, how did all this translate into pricing?
In the period 2003-2007, pricing went through the roof- particularly for the packaged goods and services sectors. From FMCG majors like Colgate and Unilever to airlines and everything in between, raised prices continuously between 2003 and 2007.
Capacity increases often take time and in the period where industry was constrained by capacity, prices increased sharply.
These packaged goods and services, do not have a significant impact on the calculation of inflation in India, official inflation continued at 5%. The less affluent families also did not see their basket of goods (mainly non processed food) becoming very expensive.
There was a complete “free for all” interms of pricing and companies reported huge profits in this period.
The year 2008:
In 2008, commodity prices started impacting India as well and the price of basket of goods that are used to calculate inflation, rose 12%. India also began to take note of the global slowdown, which through the fall in exports of products and services, hit home sometime in the second half of the calendar year 2008-2009.
Sentiment fell. We wrote at that stage that the large and untapped Indian market was reason enough for entrepreneurs to focus on satisfying domestic demand, and not worry about global sentiments. We added that as long as the companies representing “new India” - Infosys/ TCS/ WIpro did not lay off staff, there would not be any risk of mass layoffs and hence the economy would be able to continue growing, albeit at a lower pace of maybe 5-6%. On top of this, the government announced various incentives (farmer loan waivers/ infra investment/ pay scale revision of govt employees) all adding to almost 200 Bn USD. This is a big investment for a 1 trillion USD economy.
Companies reacted by initially holding prices steady and accepting declining volumes. A very bizarre approach in the mass market segments. Sure enough, worsening sentiment coupled with high prices (given salary increases were minimal in 2008), meant that the Indian shopper stayed home. Retail sales collapsed in the 3rd Qtr of 2008.
By the end of 2008 and in the early months of 2009, however, we have seen pricing sentiment and philosophy change significantly. Companies became more cost conscious and began to benefit from the worldwide fall in raw material prices. They started to reduce prices and most companies took a hit to margins as well. And companies looked to maximise capacity utilisation.
- FMCG majors such as Unilever dropped prices in the market.
- Promotions (cross promotions/ price discounts/ free volumes) on products have increased.
- Hotels have launched very sensible “all inclusive” packages taking care of food, non alcoholic beverages, laundry and sight-seeing for their guests.
- Low cost airlines became truly low cost opening a 30-40% differential versus full price.
- Capital goods manufacturers reduced prices as the government announced reduction in sales taxes.
- Real estate prices have fallen 10-30% depending on the location.
Over and above, companies have started looking at rural India as a viable business opportunity and have started to set up products and services targeted at rural masses (at suitable price points). The aggressive pricing has brought the Indian consumer back and Q4 of the financial year 2008-2009 recorded 6% growth for the Indian economy.
What happens going forward:
A new budget will be announced by the government early next week. We expect to see investments made to facilitate development of the less affluent, infrastructure development and privatisation of government companies (mostly to finance the budget deficit, but also to make them more competitive).
These will be good initiatives that will continue to increase domestic demand.
However, one concern is still agriculture- the monsoons are late. 60% of the employment sector is supported by agriculture and if the rains fail, this will impact the buying capacity of a significant segment of the population while diverting government resources from investments to direct support of the weaker sections of society.
Bottom-line on Pricing in India:
Our view is that India is a market where product availability and distribution are the most important factors for success. Marketing is very nascent and is limited to advertisements featuring prominent film celebrities. Marketing becomes important when people start having choices. In India, we are still many years behind that stage.
In our view, the capacity shortages of 2003-2007 which caused pricing to spiral out of control, have been corrected. A lot of investment went into infrastructure and manufacturing capacity in the period 2003-2007, and these will keep pressure on pricing. Investments in education, infrastructure are increasing and the supply-demand imbalance of talent should be mitigated significantly by the time the Indian economy returns again to its 9% trajectory.
Companies will find it hard to increase prices beyond “raw material increases” or the standard inflation rate (4-5%). While there is some segmentation in the market, penetrations for most product categories are less than 20% (micro waves/ washing machines/ computers/ vehicles). This means that driving penetration and hence gaining volumes and market shares in the market is the priority. The Indian consumer is price sensitive and hence value pricing and “penetration” pricing will continue to drive the pricing approach in India.
Ritu and Venkat
June 2009.
Given a lack of recent public statistics on income and income growth, we used newspaper reports and other estimates to paint a picture on the income segmentation in India in 2003 and its evolution in the period 2003-2007.
Table 1.1:
Number -------Annual inc(INR)----Average----Grth%(03-07)--Income 07----Inc grth% 08
of HH
4,000,000 ----->215,000 ---------215,000 -----25%---------524,902---------10%
90,000,000-----45,000-215,000----130,000 -----15%----------27,371----------8%
66,000,000------< 45,000----------22,000-- ----6%----------28,405----------6%
Table 1.2:
Average Inflation in the period 2003-2007 ----5%
Inflation 2008 -------------12%
Inflation 2009 -------------------1%
1 USD= 48 Indian Rupees (INR)
Given that the Indian economy grew between 7-9% in this period, these household income growths were not seen to be irregular. Income growths in the period 2003-2007 were significantly higher across all income segments, compared to inflation in the same period.
Note that salary growth rate fell in 2008 while inflation rose spectacularly (refer table 1.1)
Income growth in 2003-2007 must be seen in the context of supply and demand. While the Indian economy grew at break neck speed, the number of well educated graduates and competent managers was restrained by the lack of growth of high quality educational institutes. This resulted in high rates of turnover in companies, sky rocketing salaries and an overall increase in employment. In-fact this period also saw a large migration of people having very basic educational qualifications (grade 8 pass) moving from villages to cities where booming sectors such as retail were offering entry level jobs to people with modest education.
This means that apart from the 66 Mn households at the bottom of the pyramid, all other households were earning far more than inflation. This is a very big difference w.r.t. Western economies where salary increases are very closely tied to inflation. The savings rate in India increased from 27% in 2003 to 36% in 2008.
The period 2003-2007 was giving most Indian households real income growths in excess of 10%, taking into account inflation, and a lot of extra savings was being created
This is one of the reasons we wrote in 2008, that high inflation of 12% in 2008 was unlikely to impact the common man. Contrary to common opinion held in India that Indians would take to the streets to protest high prices, we maintained that “middle class” India had received a huge buffer in terms of salary increases since 2003 and would be able to withstand inflation of 12% in 2008. We maintained that if salaries rises were to reduce, the middle class would still be able to survive 12% inflation into 2009. But that inflation would need to fall in 2009 to 5% or lower.
The bottom most segment of 66 Mn households is agriculture dependent. This segment consumes what it produces and then sells to the market its excess. In a high inflation period, our understanding is that this segment is insulated from increasing prices of cereals and staples, since they themselves are the producers.
So, how did all this translate into pricing?
In the period 2003-2007, pricing went through the roof- particularly for the packaged goods and services sectors. From FMCG majors like Colgate and Unilever to airlines and everything in between, raised prices continuously between 2003 and 2007.
Capacity increases often take time and in the period where industry was constrained by capacity, prices increased sharply.
These packaged goods and services, do not have a significant impact on the calculation of inflation in India, official inflation continued at 5%. The less affluent families also did not see their basket of goods (mainly non processed food) becoming very expensive.
There was a complete “free for all” interms of pricing and companies reported huge profits in this period.
The year 2008:
In 2008, commodity prices started impacting India as well and the price of basket of goods that are used to calculate inflation, rose 12%. India also began to take note of the global slowdown, which through the fall in exports of products and services, hit home sometime in the second half of the calendar year 2008-2009.
Sentiment fell. We wrote at that stage that the large and untapped Indian market was reason enough for entrepreneurs to focus on satisfying domestic demand, and not worry about global sentiments. We added that as long as the companies representing “new India” - Infosys/ TCS/ WIpro did not lay off staff, there would not be any risk of mass layoffs and hence the economy would be able to continue growing, albeit at a lower pace of maybe 5-6%. On top of this, the government announced various incentives (farmer loan waivers/ infra investment/ pay scale revision of govt employees) all adding to almost 200 Bn USD. This is a big investment for a 1 trillion USD economy.
Companies reacted by initially holding prices steady and accepting declining volumes. A very bizarre approach in the mass market segments. Sure enough, worsening sentiment coupled with high prices (given salary increases were minimal in 2008), meant that the Indian shopper stayed home. Retail sales collapsed in the 3rd Qtr of 2008.
By the end of 2008 and in the early months of 2009, however, we have seen pricing sentiment and philosophy change significantly. Companies became more cost conscious and began to benefit from the worldwide fall in raw material prices. They started to reduce prices and most companies took a hit to margins as well. And companies looked to maximise capacity utilisation.
- FMCG majors such as Unilever dropped prices in the market.
- Promotions (cross promotions/ price discounts/ free volumes) on products have increased.
- Hotels have launched very sensible “all inclusive” packages taking care of food, non alcoholic beverages, laundry and sight-seeing for their guests.
- Low cost airlines became truly low cost opening a 30-40% differential versus full price.
- Capital goods manufacturers reduced prices as the government announced reduction in sales taxes.
- Real estate prices have fallen 10-30% depending on the location.
Over and above, companies have started looking at rural India as a viable business opportunity and have started to set up products and services targeted at rural masses (at suitable price points). The aggressive pricing has brought the Indian consumer back and Q4 of the financial year 2008-2009 recorded 6% growth for the Indian economy.
What happens going forward:
A new budget will be announced by the government early next week. We expect to see investments made to facilitate development of the less affluent, infrastructure development and privatisation of government companies (mostly to finance the budget deficit, but also to make them more competitive).
These will be good initiatives that will continue to increase domestic demand.
However, one concern is still agriculture- the monsoons are late. 60% of the employment sector is supported by agriculture and if the rains fail, this will impact the buying capacity of a significant segment of the population while diverting government resources from investments to direct support of the weaker sections of society.
Bottom-line on Pricing in India:
Our view is that India is a market where product availability and distribution are the most important factors for success. Marketing is very nascent and is limited to advertisements featuring prominent film celebrities. Marketing becomes important when people start having choices. In India, we are still many years behind that stage.
In our view, the capacity shortages of 2003-2007 which caused pricing to spiral out of control, have been corrected. A lot of investment went into infrastructure and manufacturing capacity in the period 2003-2007, and these will keep pressure on pricing. Investments in education, infrastructure are increasing and the supply-demand imbalance of talent should be mitigated significantly by the time the Indian economy returns again to its 9% trajectory.
Companies will find it hard to increase prices beyond “raw material increases” or the standard inflation rate (4-5%). While there is some segmentation in the market, penetrations for most product categories are less than 20% (micro waves/ washing machines/ computers/ vehicles). This means that driving penetration and hence gaining volumes and market shares in the market is the priority. The Indian consumer is price sensitive and hence value pricing and “penetration” pricing will continue to drive the pricing approach in India.
Ritu and Venkat
June 2009.
Thursday, 2 April 2009
Power Pricing
...by Robert J. Dolan (Author), Hermann Simon (Author)
A very interesting book indeed, I would recommend it to managers looking to sensitise themselves to Pricing without getting into very technical treatment.
As a pricing manager myself for the Western European region, I had the opportunity to apply a lot of pricing concepts. And the application of pricing is a tremendous source of competitive advantage.
For example, elasticity. How much more or less do consumers buy given a price decrease (or increase). Now consider a company that sells through multiple channels….wholesalers/ retailers/ the internet.
How is channel elasticity different for each trade channel. How much saving does awareness of this fact, generate for a company.
Product elasctities. Consider than you have 50 SKUs of a single product. Elasticity for toothpastes may not be the same as the elasticity for a “tooth whitening” paste or a “breath freshening” paste.
Or that a 200g paste has a different elasticity than a 100g paste. Do you capture such variations?
Then the entire notion of price setting itself. Does a new product always have to be priced high. (Not if the product category is old and very competitive!)
What market place parameters influence pricing? In the auto industry, for example, the Original equipment Manufacturers are never keen to give more than 30% of the component business related to a particular model to one supplier. They create competition.
How about the fact that some consumers hang on to really outdated car models (not as old as antiques, but old enough). The tires on those cars could be a very old design. Yet, the “hockey Stick” concept suggests that as the product enters its “end of life” phase, it may present an opportunity to increase prices so as to milk the last sales from its die-hard customers. Wow.
Another interesting topic was the flow of goods between countries. A “price corridor” is now the recommended answer, suggesting that some countries increase prices and others decrease prices so that the differential between them is low enough to discourage price flows. It raises a very deep question: Do grey market flows happen because prices are out of equilibrium or that supply and demand are not synchronised in a particular market. Figure this out before you attack pricing, else even the smallest differentials are sufficient for some intermediaries to act.
Consumer goods in competitive markets represent very interesting pricing challenges. My request to any practitioner is to start with the questions:
- What does this product do for the consumer
- How does the consumer value this benefit from the product?
Most of us take the market prices as a given while position new entrants. Its simpler. But knowing what value products create in the lives of consumers, and maximising this is a very important goal of the marketing team.
Venkat
A very interesting book indeed, I would recommend it to managers looking to sensitise themselves to Pricing without getting into very technical treatment.
As a pricing manager myself for the Western European region, I had the opportunity to apply a lot of pricing concepts. And the application of pricing is a tremendous source of competitive advantage.
For example, elasticity. How much more or less do consumers buy given a price decrease (or increase). Now consider a company that sells through multiple channels….wholesalers/ retailers/ the internet.
How is channel elasticity different for each trade channel. How much saving does awareness of this fact, generate for a company.
Product elasctities. Consider than you have 50 SKUs of a single product. Elasticity for toothpastes may not be the same as the elasticity for a “tooth whitening” paste or a “breath freshening” paste.
Or that a 200g paste has a different elasticity than a 100g paste. Do you capture such variations?
Then the entire notion of price setting itself. Does a new product always have to be priced high. (Not if the product category is old and very competitive!)
What market place parameters influence pricing? In the auto industry, for example, the Original equipment Manufacturers are never keen to give more than 30% of the component business related to a particular model to one supplier. They create competition.
How about the fact that some consumers hang on to really outdated car models (not as old as antiques, but old enough). The tires on those cars could be a very old design. Yet, the “hockey Stick” concept suggests that as the product enters its “end of life” phase, it may present an opportunity to increase prices so as to milk the last sales from its die-hard customers. Wow.
Another interesting topic was the flow of goods between countries. A “price corridor” is now the recommended answer, suggesting that some countries increase prices and others decrease prices so that the differential between them is low enough to discourage price flows. It raises a very deep question: Do grey market flows happen because prices are out of equilibrium or that supply and demand are not synchronised in a particular market. Figure this out before you attack pricing, else even the smallest differentials are sufficient for some intermediaries to act.
Consumer goods in competitive markets represent very interesting pricing challenges. My request to any practitioner is to start with the questions:
- What does this product do for the consumer
- How does the consumer value this benefit from the product?
Most of us take the market prices as a given while position new entrants. Its simpler. But knowing what value products create in the lives of consumers, and maximising this is a very important goal of the marketing team.
Venkat
Thursday, 12 March 2009
Jack of All Trades or Master of One?
A very interesting note by a marketing professor at Kellogg (click on title to read), Prof Alexander Chernev talks of the Performance perceptions of multi-feature products.
If a product has multiple functions, what does its price vis-a vis another single purpose product denote about it?
Eg: do consumers find a multi purpose product less efficient compared to a "single benefit" product at the same price? How does it change if the multi product has a higher price?
We have written on this blog that miniaturisation of technology will not only bring more "multi purpose" device into the market, but like the iPhone ensure that it performs very well on each parameter.
The research suggests a toothpast with anti bacterial and tooth whitening should be priced higher than a pure play tooth whitening cream.
We think this may be the case since you cannot actually determine quantitatively tooth whitening. Hence pricing (with the correct communication) may signal that the multi purpose toothpaste does both functions equally well, and very well. So consumer pays for the benefit of two functionalities.
What happens when an iPhone is competing with a Canon? How can consumers compare these 2 goods?
We think:
1. a consumer that a multi purpose device should be priced in such a way that each of its functionalities is more expensive than a comparable pure play device.
That is, if an Iphone is at 250 USD and has a 3 megapixel camera, it should be more expensive than a 3 mega pixel camara. (by how much, we cannot say off hand).
2. However, if the Iphone has a 3 megapixel camera and the Canon is a 10 megapixel offer, then the basket of goods is not longer comparable.
Interesting topic. Makes you wonder what actually is the pricing / profitability benefit of converging so many goods into one?
Ritu and Venkat
If a product has multiple functions, what does its price vis-a vis another single purpose product denote about it?
Eg: do consumers find a multi purpose product less efficient compared to a "single benefit" product at the same price? How does it change if the multi product has a higher price?
We have written on this blog that miniaturisation of technology will not only bring more "multi purpose" device into the market, but like the iPhone ensure that it performs very well on each parameter.
The research suggests a toothpast with anti bacterial and tooth whitening should be priced higher than a pure play tooth whitening cream.
We think this may be the case since you cannot actually determine quantitatively tooth whitening. Hence pricing (with the correct communication) may signal that the multi purpose toothpaste does both functions equally well, and very well. So consumer pays for the benefit of two functionalities.
What happens when an iPhone is competing with a Canon? How can consumers compare these 2 goods?
We think:
1. a consumer that a multi purpose device should be priced in such a way that each of its functionalities is more expensive than a comparable pure play device.
That is, if an Iphone is at 250 USD and has a 3 megapixel camera, it should be more expensive than a 3 mega pixel camara. (by how much, we cannot say off hand).
2. However, if the Iphone has a 3 megapixel camera and the Canon is a 10 megapixel offer, then the basket of goods is not longer comparable.
Interesting topic. Makes you wonder what actually is the pricing / profitability benefit of converging so many goods into one?
Ritu and Venkat
Thursday, 5 March 2009
Discounting in a downturn
Been reading a lot about retailers and brands discounting in this downturn in order to preserve sales.
Pricing is our favourite P, and all this talk of discounting motivated us to write this note.
In our view, any pricing action has to be preceded by a couple of questions:
a. are you a brand or are you a commodity?
A brand is able to distinguish itself from its competitors on the basis of being a unique and relevant differentiation. It hence charges a premium, and uses that premium to re-invest in itself and continue to strengthen its position. Michelin tires help to save you fuel, Duracell lasts longer, Ipods are sexy, Colgate gives you 12 hour protection etc.
If you have no unique distinctive characteristics that customers understand and value, you are a commodity. Go ahead and feel free to cut prices.
b. What do you want your customers to do?
Brands grow by getting in more customers or by getting its customers to consumer more. In a downturn both of these tasks will be difficult.
Brands have a core set of loyal customers and then those on the periphery that come and go. In a downturn, a brand manager must focus on keeping the core together. The core may down-trade or exit the category altogether. This must not be allowed to happen, in the long term interests of the brand.
A strong brand should however, temporarily alter the value proposition for its “core” customers to reflect the challenging financial situation. But a brand should never, never reduce prices.
We suggest to increase the value of the purchase by offering extra volumes for free. This costs less on the bottom line and has a positive impact on the consumer. At the same time, it sends out the message that because the economy is tough, does not mean the product is any worse. It signals that the brand understands the challenges of the economy, and takes the opportunity to thank its loyal consumer with the promise that it will whatever it takes to ensure that even in these challenging times, the consumer can enjoy the products he loves.
The key question is, how much is good enough? Should the brand offer 10% extra volume? Or 20%? Or 50%? There is not enough research on this ,but our understanding is that anything over 15% begins to devalue the brand.
A price reduction impacts the bottom line strongly- devalues the product, sets expectations of future bargains and limits ability to reinvest in the brand.
A 10% increase in volume (given free) has a far lesser impact that a 10% price reduction. (Please do the maths on this, its simple and very illustrative)
We do not recommend cross promotions either. Buy a HP laptop and get a printer free! Once again we apply the principle that the cost of “free gift” should not be more than 15% of the cost of the product.
On the other hand, there are premium brands like Louis Vuitton than simply never cut prices. No end season sales, no bulk discounts, nothing. These products however deal with customers exhibiting a completely different price elasticity and we shall not go into that here.
Brands take years to build, only hours to discount. We know what we wrote here may sound theoretical, but we are convinced price discounts are the surest way to kill your brands.
ritu and venkat
Pricing is our favourite P, and all this talk of discounting motivated us to write this note.
In our view, any pricing action has to be preceded by a couple of questions:
a. are you a brand or are you a commodity?
A brand is able to distinguish itself from its competitors on the basis of being a unique and relevant differentiation. It hence charges a premium, and uses that premium to re-invest in itself and continue to strengthen its position. Michelin tires help to save you fuel, Duracell lasts longer, Ipods are sexy, Colgate gives you 12 hour protection etc.
If you have no unique distinctive characteristics that customers understand and value, you are a commodity. Go ahead and feel free to cut prices.
b. What do you want your customers to do?
Brands grow by getting in more customers or by getting its customers to consumer more. In a downturn both of these tasks will be difficult.
Brands have a core set of loyal customers and then those on the periphery that come and go. In a downturn, a brand manager must focus on keeping the core together. The core may down-trade or exit the category altogether. This must not be allowed to happen, in the long term interests of the brand.
A strong brand should however, temporarily alter the value proposition for its “core” customers to reflect the challenging financial situation. But a brand should never, never reduce prices.
We suggest to increase the value of the purchase by offering extra volumes for free. This costs less on the bottom line and has a positive impact on the consumer. At the same time, it sends out the message that because the economy is tough, does not mean the product is any worse. It signals that the brand understands the challenges of the economy, and takes the opportunity to thank its loyal consumer with the promise that it will whatever it takes to ensure that even in these challenging times, the consumer can enjoy the products he loves.
The key question is, how much is good enough? Should the brand offer 10% extra volume? Or 20%? Or 50%? There is not enough research on this ,but our understanding is that anything over 15% begins to devalue the brand.
A price reduction impacts the bottom line strongly- devalues the product, sets expectations of future bargains and limits ability to reinvest in the brand.
A 10% increase in volume (given free) has a far lesser impact that a 10% price reduction. (Please do the maths on this, its simple and very illustrative)
We do not recommend cross promotions either. Buy a HP laptop and get a printer free! Once again we apply the principle that the cost of “free gift” should not be more than 15% of the cost of the product.
On the other hand, there are premium brands like Louis Vuitton than simply never cut prices. No end season sales, no bulk discounts, nothing. These products however deal with customers exhibiting a completely different price elasticity and we shall not go into that here.
Brands take years to build, only hours to discount. We know what we wrote here may sound theoretical, but we are convinced price discounts are the surest way to kill your brands.
ritu and venkat
Thursday, 22 January 2009
Some pricing notes
We visit an interesting blog called Pricing for profit. www.pricingforprofit.com
Two notes that i wanted to link here are :
1. Foru pricing strategies in a recessionary environment. Our caution to this is simply that this would apply to a wide range of products, we would not advice premium brands to follow any of these suggestions.
Rebates/ volume discounts/ free gifts etc work to increase volumes without lowering the value proposition for most mass market goods. But anything given free once sets up the expectation of future offers.
In a mass market product, the frequency of purchase and the price of the product help to mitigate these expectations. Not so for premium products.
Beware
http://www.pricingforprofit.com/blog/blog-view.php/blogid/162
2. The second note is on a bit of research that "A Beautiful Woman Can Affect Men's Pricing Decisions"
http://www.pricingforprofit.com/blog/blog-view.php/blogid/176
This has interesting applications especially for the personal loan business. But perhaps would not apply as well in markets with more easily available information.
ritu and venkat
Two notes that i wanted to link here are :
1. Foru pricing strategies in a recessionary environment. Our caution to this is simply that this would apply to a wide range of products, we would not advice premium brands to follow any of these suggestions.
Rebates/ volume discounts/ free gifts etc work to increase volumes without lowering the value proposition for most mass market goods. But anything given free once sets up the expectation of future offers.
In a mass market product, the frequency of purchase and the price of the product help to mitigate these expectations. Not so for premium products.
Beware
http://www.pricingforprofit.com/blog/blog-view.php/blogid/162
2. The second note is on a bit of research that "A Beautiful Woman Can Affect Men's Pricing Decisions"
http://www.pricingforprofit.com/blog/blog-view.php/blogid/176
This has interesting applications especially for the personal loan business. But perhaps would not apply as well in markets with more easily available information.
ritu and venkat
Saturday, 8 November 2008
An Apple eating into Nokia
We are re-visiting this note following a note we read on the drop in Nokia market share from q3 2007 (51.4%) to q3 2008 (38.9%).
Apple in the meanwhile grew from 3.6% to 17.3%. (note below)
http://apple20.blogs.fortune.cnn.com/2008/11/07/iphone-passes-rim-gains-on-nokia/
Its just a good time to repeat: No brand in marketing history has maintained high profit margins and market share simultaneously over a long period. A choice has to be made.
We believe Nokia has missed this.
We believe Apple will soon be seduced by volume market share.
There is value at the top of the consumer pyramid. LVMH demonstrates the success focusing on this segment. (but yes, we are seeing them salivate after the “entry level” products as well.
Mass market products require a mindset very different from premium products. No company has mastered these two skills simultaneously.
Premium products may offer extra-ordinary profits that need to be re-invested in the extra-ordinary consumer base. A consumer base that requires innovation and a superior product and service experience.
Mass market products require a marketing mix that invariably leads to a company focusing on maximising value for the masses of consumers. This invariably leads the premium consumer’s experience to be compromised.
The market of the “low cost” phones has grown a lot more than the overall market for cell phones. Nokia has chosen to sell in this segment. Unless it is then able to find a cost structure that allows it to have the same profitability as for its more “upmarket phones”, its capacity for investing in innovation will fall.
Exposing it to innovators such as Apple. Apple's move to price down its phones will expose it to the next innovator in the market.
As the mobile phone gets more and more “commoditised”, it is likely that cheaper manufacturers in China will be able to deliver phones at $25 without having a high cost structure due to lower investment in R&D, manufacturing costs etc.
Would Nokia be able to match this? Should it?
As an industry matures, many consumer segments emerge. Satisfying each segment well requires specific business models. Working and synchronising among these different models different skills in a company and eventually proves impossible.
Ritu and Venkat
Apple in the meanwhile grew from 3.6% to 17.3%. (note below)
http://apple20.blogs.fortune.cnn.com/2008/11/07/iphone-passes-rim-gains-on-nokia/
Its just a good time to repeat: No brand in marketing history has maintained high profit margins and market share simultaneously over a long period. A choice has to be made.
We believe Nokia has missed this.
We believe Apple will soon be seduced by volume market share.
There is value at the top of the consumer pyramid. LVMH demonstrates the success focusing on this segment. (but yes, we are seeing them salivate after the “entry level” products as well.
Mass market products require a mindset very different from premium products. No company has mastered these two skills simultaneously.
Premium products may offer extra-ordinary profits that need to be re-invested in the extra-ordinary consumer base. A consumer base that requires innovation and a superior product and service experience.
Mass market products require a marketing mix that invariably leads to a company focusing on maximising value for the masses of consumers. This invariably leads the premium consumer’s experience to be compromised.
The market of the “low cost” phones has grown a lot more than the overall market for cell phones. Nokia has chosen to sell in this segment. Unless it is then able to find a cost structure that allows it to have the same profitability as for its more “upmarket phones”, its capacity for investing in innovation will fall.
Exposing it to innovators such as Apple. Apple's move to price down its phones will expose it to the next innovator in the market.
As the mobile phone gets more and more “commoditised”, it is likely that cheaper manufacturers in China will be able to deliver phones at $25 without having a high cost structure due to lower investment in R&D, manufacturing costs etc.
Would Nokia be able to match this? Should it?
As an industry matures, many consumer segments emerge. Satisfying each segment well requires specific business models. Working and synchronising among these different models different skills in a company and eventually proves impossible.
Ritu and Venkat
Tuesday, 7 October 2008
Gillette Fusion and Pricing
Premium brands and products dont have the choice of ever lowering their prices.
Gillette Sharpens Its Pitch for Expensive RazorWe picked up this article in the Wall Street Journal on Gillette and its battle to maintain the premium price of its Fusion shaving system in these troubled economic times. http://online.wsj.com/article/SB122325275682206367.html?mod=rss_media_and_marketing
For a few months now we have been struggling to write on pricing and this article is an appropriate place to start. Here’s a brand that’s keeping its pricing and not trying to blame raw materials for an increase or the poor economy for a decrease.
As marketers, we love very deeply the Pricing “P” of the four Ps. It’s the most elegant and decisive proof of a successful marketing plan. Pricing is the most potent signal of how much a marketing team values its own offer to the consumer. It’s a key differentiator in any market.
Most companies leave pricing to the finance team. No way. Marketing does not exist if the pricing is not under the control of the Marketing Manager.
Well, here’s our take on pricing:
1. In our view, you never drop price on a product unless you accept that your value proposition for consumers has dissolved. (Note: this is not always a bad thing in itself. Most outdated technology based products cut price because new technology offers a better value proposition.)
2. Reducing prices to gain volumes and market share is a no-no. Reducing prices to protect against emerging competition is a bigger no-no.
3. On the other hand, price increases is an equally contentious subjects to us. Most companies in the past few months have raised prices on account of “raw material price increases.” Crap!
Crap, because raw material prices are now decreasing, but no one is reducing prices. So it appears that raw material based price increases are only crutches for a marketing team lame on good ideas and a company lame on good products.
Increase prices if you believe you have increased value. If you are following raw material prices in your pricing strategy, make sure you REALLY follow it. In both directions.
4. Essentially, you launch a product at a price point. You maintain it. If you’re creating strong demand, you will have the opportunity to raise prices. However, if entry barriers are low, high margins will attract other competitors. Then either you look for more differentiation to justify high prices (this is good and the basis of all marketing) or you drop prices (which takes us to point 2).
Coming back to Gillette. By not reducing prices of its Fusion shaving system blades, what is Gillette signalling to Venkat?
1. You Venkat, who bought the product for over a year at price X, need not feel that you were overcharged.
2. Because the economy is bad, does not mean our product is any worse.
3. Because the economy is bad, does not mean you, our customer shouldn’t have the best shave money can buy. You might as well stop buying toothpaste and chew on the bark of a “neem” tree.
4. You may choose not to buy the fusion. And we have a number of other products you could choose from. But when you’re feeling better, and think you’re ready to go back to the best, we’ll be waiting.
As a side note: another interesting “premium” brand Louis Vuitton has never had a price promotion (or any sales promotion) in its history. Never.
A price premium position takes years of R&D, marketing, sales efforts to develop.
Once you discount a brand, the expectation of future discounts will always remain. You will never again be completely trusted. There is no way to calculate the current value of these future discounts when taking a price reduction decision.
So Gillette, we salute you. Venkat may not buy a fusion blade for a while, but he will again, one day.
However, Gillette we pick fault with your advertising approach at this time. Your communication now is “In the world of high-performance, what machine can you run for as little as a dollar a week?” Why try to play down your price?
Premium products should never walk that path. Premium products charge a premium for an outstanding product experience. Period.
We would have focused the Gillette ad on the best shave a man can get.
“Sure the world’s looking pretty bleak now… even more reason you pamper yourself in the small ways that you can.”
Ritu and Venkat
Gillette Sharpens Its Pitch for Expensive RazorWe picked up this article in the Wall Street Journal on Gillette and its battle to maintain the premium price of its Fusion shaving system in these troubled economic times. http://online.wsj.com/article/SB122325275682206367.html?mod=rss_media_and_marketing
For a few months now we have been struggling to write on pricing and this article is an appropriate place to start. Here’s a brand that’s keeping its pricing and not trying to blame raw materials for an increase or the poor economy for a decrease.
As marketers, we love very deeply the Pricing “P” of the four Ps. It’s the most elegant and decisive proof of a successful marketing plan. Pricing is the most potent signal of how much a marketing team values its own offer to the consumer. It’s a key differentiator in any market.
Most companies leave pricing to the finance team. No way. Marketing does not exist if the pricing is not under the control of the Marketing Manager.
Well, here’s our take on pricing:
1. In our view, you never drop price on a product unless you accept that your value proposition for consumers has dissolved. (Note: this is not always a bad thing in itself. Most outdated technology based products cut price because new technology offers a better value proposition.)
2. Reducing prices to gain volumes and market share is a no-no. Reducing prices to protect against emerging competition is a bigger no-no.
3. On the other hand, price increases is an equally contentious subjects to us. Most companies in the past few months have raised prices on account of “raw material price increases.” Crap!
Crap, because raw material prices are now decreasing, but no one is reducing prices. So it appears that raw material based price increases are only crutches for a marketing team lame on good ideas and a company lame on good products.
Increase prices if you believe you have increased value. If you are following raw material prices in your pricing strategy, make sure you REALLY follow it. In both directions.
4. Essentially, you launch a product at a price point. You maintain it. If you’re creating strong demand, you will have the opportunity to raise prices. However, if entry barriers are low, high margins will attract other competitors. Then either you look for more differentiation to justify high prices (this is good and the basis of all marketing) or you drop prices (which takes us to point 2).
Coming back to Gillette. By not reducing prices of its Fusion shaving system blades, what is Gillette signalling to Venkat?
1. You Venkat, who bought the product for over a year at price X, need not feel that you were overcharged.
2. Because the economy is bad, does not mean our product is any worse.
3. Because the economy is bad, does not mean you, our customer shouldn’t have the best shave money can buy. You might as well stop buying toothpaste and chew on the bark of a “neem” tree.
4. You may choose not to buy the fusion. And we have a number of other products you could choose from. But when you’re feeling better, and think you’re ready to go back to the best, we’ll be waiting.
As a side note: another interesting “premium” brand Louis Vuitton has never had a price promotion (or any sales promotion) in its history. Never.
A price premium position takes years of R&D, marketing, sales efforts to develop.
Once you discount a brand, the expectation of future discounts will always remain. You will never again be completely trusted. There is no way to calculate the current value of these future discounts when taking a price reduction decision.
So Gillette, we salute you. Venkat may not buy a fusion blade for a while, but he will again, one day.
However, Gillette we pick fault with your advertising approach at this time. Your communication now is “In the world of high-performance, what machine can you run for as little as a dollar a week?” Why try to play down your price?
Premium products should never walk that path. Premium products charge a premium for an outstanding product experience. Period.
We would have focused the Gillette ad on the best shave a man can get.
“Sure the world’s looking pretty bleak now… even more reason you pamper yourself in the small ways that you can.”
Ritu and Venkat
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