Value Pricing at Procter & Gamble
Table of contents
The P&G pricing system in the 70s and 80s was oriented towards market share.
Please describe the prisoner’s dilemma in which those companies in the P&G’s markets got rewarded that maintained or increased their price promotions. For sake of discussion, let us use a single company (Unilever) as an example to illustrate how all the companies in P&G’s markets experience prisoner’s dilemma. Since Unilever and P&G operate in the same market, a lot of their actions are interdependent on one another. Initially, the two firms were engaged in a prisoner’s dilemma. Major moves in product, pricing or policy without providing their intentions to the other would result in losses for both companies.
Thus, a surprise move by any firm would yield lead to inefficiency. Ideally, both parties would prefer to escape the dilemma. This desire would give birth to a cooperative set of behaviour between the two players. This cooperation however would cease if Unilever (or P;G) decides to change its behaviour by increasing or maintaining its price promotions when P&G (or Unilever) chooses to cut back on promotions. Such a move by Unilever would lead to the adoption of a sequential games situation by both firms as the traditional cooperation would no longer exist.
By looking ahead to the future response of P&G and reasoning back to the present, Unilever decides that this approach would be best for the firm. By increasing promotions without notifying P&G (which is planning to cut back on promotions), Unilever may see an advantage to the firm. This is referred to as opportunistic behaviour. Unilever may have the perception of P&G as being a bullying firm, and Unilever did not want to be left cooperating only to have P&G cheat. Since the two firms were cooperating, both firms would be expecting the other to react to such a move.
P&G now faces a dilemma whether to increase its price promotions, or to devote funds to increase advertising on products, or to go ahead and cut back on promotions (original plan and the riskiest). Although it is uncertain how they respond, there is no doubt that Unilever would have analysed the probabilities of P&G’s potential reactions. Since consumers had become increasingly price sensitive, P&G would lose out in market share if they did not react. It is likely that they would choose to respond with a tit-for-tat move through mimicking Unilever in order to penalize them for cheating.
This would result in Unilever hitting back, thus causing P&G to deliver a second punishment. There is no doubt that Unilever analysed this position of P&G and decided on the probability of P&G’s response. Since P&G has value in other markets, it is likely that they would respond and react. Though a reaction is likely, Unilever knew that its consumers are risk-averse. Thus by surprising P&G with higher price promotions, consumers would attach loyalty to Unilever products before P&G could come up with a strategy.
If P&G reacted by offering similar promotions, consumers would continue to purchase Unilever products till the prices offered by P;G are low enough (resulting in lower profits) to make consumers shift their loyalties.
Value Pricing At ProcterGamble
4 P&G could; however, do a number of things to overcome the risk aversion involved in Unilever’s move. First, they could rely on their reputation to launch similar or better promotions, since risk aversion would be minimal as both firms are well-known national chains.
They could advertise against Unilever, or launch ads which compare the prices; something that had not previously been done when the two firms were cooperating. Since this reaction is probable, Unilever has established that this reaction by P&G will result in an economic advantage in at least one of its markets. Perhaps P&G’s reaction would allow Unilever to go ahead and capture new markets while P&G counters this initial move. Unilever decided to cease the cooperative strategy and made an opportunistic move by offering higher price promotions without notifying P&G.
Before doing so, it was imperative that Unilever analysed the probable reactions; as well as, the results of these actions. Though it would likely elicit a tit-for-tat response, Unilever felt that the probable outcome would be advantageous enough to cease the cooperative strategy. Unilever’s approach demonstrates an ability to look ahead and reason backward to select a move that will help them to gain market share at the cost of P&G (or basically any company which chooses to cut back).
Which was P&G’s organizational problem that enforced these strong promotional activities? Each business category which consisted of a collection of up to 3 brands was headed by a General Manager. The General Manager of each category had ownership of his/her own Profit and Loss statement. Within the category each brand was managed by Brand Managers. Each brand group was responsible for the success of the brand they managed. Hence there was competition within brands for the promotional budgets as well as manufacturing capacity.
Promotion up the ranks within P&G was dependent on the sales and profits of each brand in the case of brand managers and for each category in the case of category General Managers. Even though a criteria like the ability to develop the skills and talent pool of the people lower in the hierarchy was present, it was still the sales and market share parameters that dominated the promotion decision within the firm. Amidst the fight for market share among FMCG (fast moving consumer goods) companies, promotional spending increased and soon became a norm.
Brand Mangers in P&G had short stints on a given brand (maybe a year or two) before they moved either horizontally, vertically or out of the organization. Since compensation and evaluation of performance was dependent on growth over previous year’s sales, managers pushed for relatively more promotional spending, in-order to increase market-share and sales irrespective of the cost. The short-stint of managers did not give them any incentive to think about the long term profitability of the brand, since they were not the ones who would be
Value Pricing At Procter & Gamble
5 held accountable in the long term. This led to a short-term focus by the manager for their own gain/incentive rather than looking at the broader picture and profits of the company as a whole. Hence strong promotional activities were enforced due this particular organization and incentive structure.
Risks of Implementing Value Pricing
The category manager for dish care, John Bess, was considering the introduction of value based pricing (= fair price; lower list pricing than before, but less promotions).
Please describe the major risks for P&G in 1991 in case of implementing value pricing in the market for light-duty liquid detergents. Following are the main challenges and risks that P & G could face on implementation of value pricing 1.
Applying and implementing the value pricing across the company shall certainly have operational difficulties. This shall be complicated considering the large company and category size, various brands in the LDL Detergent Category, 8000-person sales force and thousands of customers.
Difficult to Maintain Price Stability
Price Stability is critical to build and maintain a strong brand franchise and value pricing aims for the same. The category saw four price changes per year, on average, and there are 64 different price zones across the U. S. making it more challenging to implement the value pricing. Even if executed, it will be really difficult to create and maintain a significant price impression in the consumer’s mind. 3. No cushion for absorbing abrupt changes in raw material prices- These price changes shall have to be passed on to customers thus defeating the purpose of providing value pricing to the customers.
This may also lead to fluctuations in prices.
Opposition by Distribution
Channel Members: Margins and benefits to distribution channel members – retailers, distributors and wholesalers shall be squeezed under value pricing. There are fears that wholesalers and retailers may oppose the move and can either punish P & G in some way so as to deter competition from taking any such moves or can altogether deny passing the lower prices to the customers or at the worse, delist P & G products.
Uncertainty About Volume and Revenue Forecast
Value Pricing is very new to P & G and thus there is an uncertainty about the profit of the company and different members in the distribution channel in case value pricing is adopted by P & G. Besides this is an untested experiment. And the risks are huge (P & G market share for the category is too low (10%), and it will be difficult to lead the remaining 90% market.
Promotion and Price Pressure from the Competition
LDL has become a promotion-intensive category and is one of the most heavily promoted categories in the grocery store.
P & G’s own research showed that the Value Pricing At Procter & Gamble (A) 6 market share was highly correlated with leadership in major media and feature advertising. Competitors like General Foods and Nestle have been fighting hard on price. So reduction of spending on promotion (as for value pricing) may hit back P & G in future.
Impact on customers
Value pricing shall make P & G move away from discounting. Thus, it may lead to the loss of discount-searching customers to the competitors who rely heavily on providing discounts and coupons to customers.
Value pricing may lead to almost 10-20% price reduction and can altogether reposition the P & G products in the market. Value-based pricing may increase the loyal customers but the impact shall be much slower whereas the loss of the discount-searching customers shall be immediate. Long-Term gains with the increase in loyal customers may probably be well off-set by the loss of discount-searching customers.
Loss of Shelf Space
Prominent visibility and placement of a product is an important factor for the customer in order to make a purchase decision.
Move to value pricing shall lead to the loss of fair share of shelf space and display allocation as no emphasis on the same is being laid in value pricing.
Fall Out Impact
Introduction of value pricing is a significant decision for P & G and shall require radical changes at the organizational level. P & G had not done anything this radical on such a scale earlier. In case of the Value-based pricing not working for P & G, the fall-out effects can put the business at high risk thereby impacting brand and category profitability and customer loyalty at risk.
Short Proposal for Value Pricing
In the coffee market, P&G’s own research showed that market share was highly correlated with leadership in major media and feature advertising. The responsible managers had many arguments not to introduce value pricing. However, assume you really want to implement value pricing. Please write a short proposal including recommendations for new list prices and budget requirements across the various marketing vehicles. Effects on sales and profits should be included.
Please use case exhibit 13 as a basis for your pricing proposal (current, old plan) and calculate changes in the plan due to the implementation of value pricing (new plan). Even though our own research showed that market share was highly correlated with leadership in major media and feature advertising, which does not suggest Value Pricing strategy for coffee category, we still think this method can help us to achieve higher profit, based on reasonable assumptions and planning.