Knowing when price followship is the better strategy by Michael Hurwich

Case Study


Packaged goods companies have traditionally emphasized market share with the belief that revenue, and profit, will follow. After years of chasing the market leader for share, this case study company refocused on improving the bottom line. Market share stabilized and profit doubled after one year.

Background


At the beginning of the 1980s, Crest was the U.S. toothpaste category leader, in terms of price and market share. Its principal competitor, Colgate, believed it was within striking distance of Crest's leadership and invested heavily in targeted advertising, product improvement and price promotions. For example, Colgate took the lead in product improvements through its anti-plaque formula and developed television spots to appeal to children and young adults. Over the next several years, Crest demonstrated that it was not prepared to cede its leadership status, and Colgate's initiatives were met with strong retaliatory strikes. When Colgate advertised its entire line of oral-hygiene products, for example, Crest directly attacked Colgate in advertising.
Shortly thereafter, both Crest and Colgate began aggressive consumer price promotions to attract new consumers with Colgate offering coupons and —Buy 3 Get 1 Free“ promotions while Crest was sending $1.50 coupons to Colgate users. By 1990 after years of aggressively pursuing Crest, Colgate's toothpaste market share was lower than when it started.

A New Direction


By 1990, Colgate-Palmolive had become increasingly concerned with the reduced profits suffered in its aggressive fight for market share leadership in the toothpaste category. As a result Colgate embarked upon new strategies with the overall objective of protecting margins and increasing profit. Price increases were taken and market share decreased slightly; profits, however, doubled. Colgate, for the first time, was clearly focused on producing profits and avoiding the fight for leadership. Colgate's quest for profit, and not market share, proved to be effective.

Lessons Learned


Brands must have the right levers to achieve and maintain price leadership in any market. Colgate clearly did not have those levers. Colgate did not have the necessary brand loyalty to raise the price ceiling for toothpaste, nor was Colgate able to discipline competitors such as Crest when they undercut its price. In addition, there was no consistent communication or subsequent behavior by Colgate to indicate it could be the price leader. A more profitable alternative for Colgate was to pursue a price followship strategy.
The strong brand equity Crest had earned thwarted Colgate's attempt to increase its market share. When Colgate accepted a second place position in the toothpaste market and changed its focus to margins, profit doubled. By pursuing this strategy, Colgate continued to improve profit while maintaining and even increasing market share.