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The limits of price as a strategy

The limits of price as a strategy
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First Published: Sun, Nov 27 2011. 11 16 PM IST

Shyamal Banerjee / Mint
Shyamal Banerjee / Mint
Updated: Sun, Nov 27 2011. 11 16 PM IST
As a schoolkid in Bangalore, I went shopping with my mother to an outlet called Janatha Bazaar. I remember it had the best range of products and the shop always seemed full of shoppers. I learnt it was a government outlet and hence sold goods at the lowest prices and also sold a lot of products that were in short supply in the 1970s.
The 1970s can be described as the era of nationalization, price control, high taxes and duties. There was little competition and the choice was often between two average quality brands. It was the era of basic branding in India led by multinationals such as Hindustan Lever, Food Specialties Ltd (Nestle), Richardson Vicks (P&G), Pond’s and challenged by Indian firms such as Tata’s TOMCO, Sarabhai (Swastik, Det). This period can also be described as the “price” era as nearly all firms competed on one variable—price.
Shyamal Banerjee / Mint
Unfortunately, this price hangover persists 40 years on. From marketing basics, one can use price as a lever in three situations: a) To open a low penetration market where affordability is a challenge, e.g. shampoo sachets in the 1990s, or getting people to experience flying via low-cost airlines in the 2000s; b) If you are a late entrant in a mature market and have a parity product; and c) If you have some advantage or benefit because of which you are the lowest cost producer in the category.
Nirma started the price debate and captured the imagination of the world with a product that was less than half the price of a superior detergent—Surf. It was the first true example of a product and brand tailored for the bottom of the pyramid. Every business school wrote a case study on Nirma and had a field day labelling Hindustan Lever as weak and lost. Nirma lost significant ground when Hindustan Lever came back with a similar offering in Wheel and innovated better than Nirma on the business model and sensory appeal of the brand. A few months ago, Nirma declared that it would wind down the detergents business and focus on real estate. The role model in price wars has retreated after 25 years. Has The round gone to Hindustan Lever?
There’s another, similar, example from a habit-forming product category. Toothpaste is an example where price hasn’t worked. A few years ago, Babool and Anchor were price fighters. Colgate introduced Cibaca as a defensive move. Hindustan Lever planned to launch Aim and then withdrew it. Today, most of the low-price toothpaste brands are dead.
Companies also use price as a lever to convert a basic category. ITC tried Hero as a brand to convert from bidis to cigarettes. In test market they realized that the gains for Hero were more from their own cigarette portfolio and less from bidis. ITC then stopped Hero. It was a sensible decision. Duncans launched Smokettes to avoid huge excise costs and thus lower the price of cigarettes. It was a different product, the product was bad and it died without smoke.
The same approach was used by beverage brands to disastrous results. The Rs 5 price point was signalled as the biggest strategy breakthrough in the cola market. It was a financial disaster for both Coke and Pepsi. Both firms have raised prices now and their balance sheets are healthier.
Some brands and companies have bet the bank on price and almost none of them exist now. Akai in music is a great example. Akai ran exchange offers for one rupee and was the most aggressive price fighter in the durables business. That brand and business don’t exist now. Subhiksha gave away margins to consumers and signalled the lowest prices in retail. Today Subhiksha has neither a business nor consumers. And finally a brand that tried the price route, faltered, and quickly revamped strategy was Maggi 2 minute noodles. They were hurtling into an abyss with the price strategy till good marketing thinking prevailed.
It is, of course, hard to generalize beyond a point. But it is possible to draw some conclusions—call them lessons if you want. For one, don’t think of price alone, think of value too. That means thinking innovation and sensory benefits also. For another, the Indian consumer is aspiration led. Price alone will not build a great, sustainable, brand—price alone will not build a business.
The consumer will always say that price is important but that does not mean that she will sacrifice something else for price, and that’s where value thinking comes in. What else does she value apart from price and is unwilling to give that up?
At another level, you should compete on price only if you are the lowest cost producer or else you are giving away margin. Then, if you have price brands in your portfolio, you require complimentary premium brands or else the business will always be challenged.
It is also important to realize that you need a different business model to run price brands. If run well, this new model could have lessons for other parts of the business as well.
Finally, remember that half products don’t sell, even if the price is below half.
D. Shivakumar is managing director of Nokia India
Comments are welcome at theirview@livemint.com
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First Published: Sun, Nov 27 2011. 11 16 PM IST
More Topics: Consumer | Price | Cost | Shopping | Product |