Value pricing at Procter & Gamble

Team MembersAditya R: DM16102Aditya V: DM16154Shalini : DM16141Akash K:DM16104

Himanshu:DM16118Vijay:DM16156

P&G: A brief overview• P&G is a multinational American corporation

headquartered in Cincinnati, Ohio

• Founded in 1837 P&G is well known for

brands like Tide, Crisco,& Crest

• It has four broad product categories

1) Laundry & cleaning

2) Personal Care

3) Food & Beverage

4) Paper

P&G “Value pricing” strategy

• The setting of a product price, based on the

benefits it provides to consumers is value pricing.

• P&G wanted to modify its pricing to consistent list prices requiring any promotional spending.

• Value pricing bandwagon in LDL (Light duty liquid) & coffee

Consumer confidence

Product safetyConsistent

Quality

Core elements of value pricing for P&G that Durk Jager wanted instead

of huge spending on trade and consumer promotion.

P&G marketing budget

Category of spending 1981 1991

Trade deals 36% 50%

Consumer promotion 22% 25%

Advertising 42% 25%

Trade promotion Retailer promotion Consumer promotion

Advertising allowance Price cuts Couponing/sampling

Trade coupons Displays Price packs

Financing incentives Feature advertising Value packs

Contests Retailer coupons Premiums

Case allowance Contests Bonus packs

Marketing swamp: Inefficiencies of trade spending• Increased trade spending of $2.5 billion in 1991

by P&G lead to the following

1) Lower profits due to decreased brand loyalty

because of wide fluctuations in shelf prices.

2)Informational advantage for powerful retailers

3)Threat of delisting with promotion cuts

4) Arbitrary tactics like forward buying &

diverting

Impact of long term promotions: LDL

• In LDL segment there was 1% decline in sales

volume due to ADWs.

• Although total market share increased from 50% to

53% no significant shift in market share of individual

brands.

• In 1991 even though DAWN had 25.9% market share

only 25% of sales were purchased on promotion.

• Customers were not strong brand loyal with value

proposition losing transparency.

• Elimination of price packs to avoid deep

discounting

• $5 million after tax budget for special coupon

programs

• Huge allocation for off-invoice discounts

• Attempts to reaffirm purchase decisions by

90% budget allocated for television campaigns

Impact of long term promotions: LDL

• From 1965 to 1991 per capita coffee

consumption decreased by 50%.

• Coffee was highly price sensitive segment with

28% consumption accounting away from home

• Highly fragmented market across geographies

• Huge advertising spending from General foods

to over $70 million /year with a 48% SOV

Impact of long term promotions: Coffee

• Emerging competitors like Chase & Sanborn

offering substantial savings with low prices

and huge promotions (78% sold on deal)

doubled market shares to 2% nationally.

• Hence Coffee segment can attract increased

volume by adopting long term promotional

strategy

Impact of long term promotions: Coffee

List price reduction

Pricing LDL COFFEE

Average unit price 19.34 56.25

Sales ( In million $) 580.31 964.12

Realization 340.31 432.78

Marketing expenditures 186 377.08

Advertising 30 58.28

Coupons 36 53.13

Derived profit 154.31 55.70

Since the profit margin in LDL is higher list price reduction of about 10-15% is possible unlike in Coffee segment where derived profit is low because of high marketing expenditures

Pure pricing or pure costing?

• For reclaiming category leadership P&G must

resort to pure pricing to ensure customer

loyalty in terms of value pricing

• Potential reductions in BDF and off invoice

with sustainable deal promotions and low list

prices in both LDL and coffee segment

• Top off line profit targets could met with less

riskier credible price cuts around 10-20%

Customer attitude to radical price change

In segments like LDL radical price changes will lead to increased sales in short run but will not be sustainable in long run with competitors following the same pricing

But in segments like Coffee which is price sensitive radical price cuts will help in achieving increased sales & customer loyalty

Effect of changes & risks

• The price reductions & various value pricing

strategies will result in the following

1) Constant price wars in LDL category

2) Low ring of margins for retailers will bear the

risk of delisting of products

3) Low profits in Coffee segment

4) Constant brand switching of customers

Approach for LDL & Coffee

LDL: 1) Lowering of list prices because of high profit margins

2) substantial reduction in trial purchases with increased display space > 80%

Coffee: 1) Increasing market share through savings deals

2) As profit margins are low, cost cutting expenditures on feature/display expenditures will help increase margins & shares

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