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.

Over Deliver & Under Price: How Much is too Much? by Tammy Power

CUSTOMERS ARE AFTER TWO THINGS: the best price and the best value for their money. Naturally, you want to provide the highest level of value for the lowest price and still make a profit. Think that's easier said than done?

When price outweighs value, customers simply will not buy. When value outweighs price, customers will buy, yet companies won't reap the rewards they're entitled to. In trying to deliver the best product-service offering to customers, companies sometimes give away too much, leaving significant incremental revenue unrealized. So, how can you tell if you are delivering too much value at too good a price?

To understand if your company is over-offering, it's necessary to understand the price/value relationship. In a price/value map (far right), customers' perceptions regarding the fairness of price are plotted against their perceptions of the fairness of value in order to give a strategic overview of the competitive situation. The diagonal through the graph can be described as the fair value continuum. Any point along this line is where price matches value-whether or not this is the best point or your company is relative to where your competitors lie. In general, residing on the line is a good place to be when competitors reside on that line as well.Value-based pricing requires constant price adjustments to ensure all potential revenue is being captured. Pricing too high will result in your customers migrating to the competitor who seems to offer more value at a better price. On the flipside, providing an abundance of value for too little a price will undercut your own profit. In that situation, it's advisable to either raise the price or to reduce the amount of value by unbundling the product-service offering.

When a company charges too low for a high-value product, customers may start to question quality. Since price plays a role in the perception of a product's quality, a low price may convey the image of a low value product. This organization was extremely concerned with value, as delivering superior value to the customer was entrenched in all branches of its product offerings. Consequently, as the organization did not want to unbundle the value, it raised the price.The decision whether to reduce price or to reduce value is a strategic one and should be aligned with the company's goals and values. Understanding and communicating the delicate balance between price and value will result in customers who feel they are getting the most for their
money and allow organizations to optimize their profits.

How to price where customizability is a key selling factor

Now more than ever, attracting stakeholders by targeting them directly is hugely important in successful marketing campaigns. In a society that is run by on-demand information and where customizability is the biggest selling factor, there is a new pressure created on pricing tactics that was relevant before but not nearly to the same extents it is now. Nonetheless too much demand for custom pricing strategies can be very detrimental to the overall objectives of any organization.

The best way to deal with such a high demand for customization is effective use of price promotions.

When dealing with retail pricing, companies typically use price promotions to attract new customers to products in their introductory and growth stages. 

While promotional pricing can be effective in meeting objectives, there is the risk of triggering unwanted customer behavior patterns. Here are three considerations to keep in mind to ensure your customers respond positively, over the long term.

1. Keep the ceiling up

Customers do not think in terms of “promotional price” versus “regular price”. Instead, they form opinions over time of what is a “good” price and what is a “bad” price. Aggressive promotions cause buyers to expect a lower and lower price to consider it “good”. As a result, companies can expect lower volume at regular prices since customers will increasingly see them as unfair or “bad”. As a result, the price ceiling will fall.

In addition, customers generally remember the lowest price they have paid for a product or service with the result that even a limited time special offer can change customer expectations over the long-term.

What to do: Avoid excessively deep price promotions. If building volume is the objective, use a smaller discount and run the promotion longer or more frequently. While you may not experience the same uplift as a deep discount, you will protect the integrity of your regular prices over the long term.

2. Encourage long-term customer loyalty

Many companies view price promotions as a means to build a perception of brand value. In some cases, however, price promotions merely equate to an attempt to buy customer loyalty. For example, in the telecommunications industry promotions such as cash incentives often encourage customers to switch service providers. While these types of promotions may be effective in building volume, they do little to retain it. They say to the customer, “It is all right to be disloyal and switch for a better price”, resulting in customer “churn”, frequent switching among suppliers. Over time, these promotions encourage customers to base their purchase decision primarily on price rather than the value of the product and/or service, often leading to commodity type prices. In addition, this kind of price promotion can alienate your current, loyal customers who are not privy to this type of exclusionary discount. 

What to do: Substitute price reducing promotional tactics with promotions that incentivize consumers to purchase for non-monetary rewards. Promotional gifts and frequent “buyer” credit points are examples. These tactics achieve sales oriented goals while taking the focus away from price in the purchase decision, helping to preserve the perception of quality that surrounds a particular brand. If you feel that you must offer a promotion for switching suppliers, provide a similar incentive to current customers to reward them for being loyal and to help retain the newly won customers.

3. Discourage forward and/or delayed buying

Companies that use price promotions frequently, or during specific times of the year, often find that overall volume does not grow as expected. This occurs usually because of forward and/or delayed buying. Forward buying means that customers stock-up at the promotional price. Delayed buying involves customers waiting to make a purchase in anticipation of a future price promotion.

Over the past 10 years, for example, many cosmetics companies have offered attractive bonus packs to customers. One particular company runs its promotion at the same times in the spring and fall each year with the result that over 50% of its sales occur during these two periods. Customers have been trained to delay purchases until the promotional period and stock up on the product when retailers are offering the promotion. 

What to do: Change the timing, frequency, and depth of your price promotions. Inconsistency will help avoid forward and/or delayed buying. There is no doubt that price promotions, when used appropriately, can be powerful tools in building an effective pricing strategy. However, the key to successful long-term profitable use of price promotions is to achieve an optimal frequency of usage that creates significant volume lifts for the product without encountering any major pitfalls.