With this piece, we take a look at the roles and types of Pricing in Business Decision Making. The author, Saurabh Bajaj, is a Marketing Head (Dairy) at Britannia. He’s contributed several pieces at Casereads – you can find them all here and this is one of those tremendously helpful pieces written for us.
Alright, let’s now take a look at the piece.
Pricing is perhaps the decisions that have the most direct correlation to the business bottom line. And, hence, the profit profile that you wish to hold depends upon the pricing decisions that you are willing to take. If you Price too high then competition may undercut you, if you price too low, you will not have margins required for investment.
So how do marketing professionals go about making this crucial decision?
While there are several subtle nuisances, let me start with the business basics, on the key pricing positions that any player in the market can decide to explore.
Types of Pricing Strategies
There are four intuitive positions that most companies may consider when they review their portfolio:
– Super Premium
Related: Take a look at the Pricing psychologies
Now, given that most of my experience has been in India, the most common price position considered is that at the Mass Tier. I would take Good Day Biscuits, Santro, Blenders Price, Kit Kat as examples of brands that operate at healthy profits and offer their services to the vast majority of the great Indian middle class.
The next tier is Premium and in my experience, a price band of 1.2x to 1.3x of the Mass tier is crucial to building a relevant business at a premium position. Now, this premium of 20-30% is crucial as my empirical learnings suggest that the consumer is comparatively flexible within this price band. The consumer is usually willing to up-trade given enough reason to do so.
The super-premium band is a wide band and exists from anywhere above 1.3x to 10x of the Mass tier. However it requires providing a significantly differentiated experience and few brands, products, and companies are able to carry off the experience required to charge that premium.
The final tier that I will talk about is the Affordable tier. This is when a product or business is able to offer an experience quite close to the benchmark at the mass tier at a Pricing that is 0.7- 0.8 x of the Mass tier. This typically requires quite a stretch as it often becomes a volume game at wafer-thin margins.
Let’s take a look at the Rationale behind each of these pricing strategies.
While most of us just look at market benchmarks while deciding the pricing, it is the actual “rationale” that determines this crucial decision. Pricing rationale eventually comes down to profits and most corporates would like to deliver a bottom line that is at least 2x of Bank Interest. And hence the corporate sector aims to deliver a Net Operating Income of 12 to 15%. The Cost of Goods, Advertising Spends & Business Overheads that can be sustained for a Scalable Business while delivering a 12-15% Operating Incomes what leads the Pricing for a Mass player.
The mass pricing strategy is of course very vulnerable to attacks from the top and bottom and hence requires stringent quality checks, product consistency and consistent brand building to fend off attacks from the top & bottom pricing positions.
Examples of companies that have done this well include Cadbury Dairy Milk, which has been the gold standard of chocolate for the longest time, so has Good Day in Biscuits, Surf Excel in detergents & Lux in Soaps.
Related: Take a look at the story of Mondelez India
Premium Pricing is usually the most attractive position in any market as it enables an organization to participate in a scale business play with subtle differentiation. Also given similar Cost of Goods, a Premium position can garner as much as 4x of Profits of the Mass player at 50% of the scale. Some of the examples of products that have managed to justify and hold a premium position in the market include Cadbury Dairy Milk Silk & Dove in Soaps.
Now this price position usually requires very substantial product differentiation as well as aggressive investment in brand building.
The visible markers of product differentiation in Cadbury Dairy Milk Silk are its position of the softest, meltiest chocolate and that of Dove is a soap with 1/3rd moisturizer. Further, a rationale needs to be built in your mind to pay more. You buy Silk for that intimate indulgent moment where only the best will do. Similarly, you buy Dove to preserve your real, natural beauty through hydrated skin.
The product differentiation as well as the rationale to spend that 30% more needs to ring in your mind each time you buy the product.
The Super Premium Pricing
The strategy that, I have seen most often fails is the super-premium strategy, especially in the Indian context as we are as consumers, sceptical, well informed and pride ourselves on buying smart. The moment a product breaches the 1.3x Pricing position, we instantly become sceptical. Precisely why few brands have been unable to garner scale in the Indian landscape at such a position. These include Bournville Chocolates, Good Day Chunkies and the premium vodkas like Grey Goose.
Now, Bournville invested in some brilliant advertising touting its claims made from pure Ghanaian cocoa and an exciting proposition of ‘You have to earn it’. But believe me, carrying off such a premium position even with the best product in the Indian landscape requires a fundamentally superior degree of brand building.
Another category that does this exceptionally well globally but definitely struggles in India is the vodkas. Now Vodka as a physical product is colourless, odourless and tasteless. Yet I have seen Absolut vodka doing a good job of operating at the Premium-priced position versus Smirnoff, however, Grey Goose at least in India struggles to hold its own.
The example of a brand that I believe has managed to carry off a super-premium priced position is Epigamia Greek Yogurt versus Flavored Yogurts with a clear demonstrable claim of superiority of having double the protein of regular flavoured yoghurts. The crucial learning my head is that at a Price premium of 1.2-1.3x you can win versus your source of growth through physical and emotional differences.
But a Price position that is 1.5-2x of mass products you need to create a new category with new reasons for consumption.
Affordable Game Plan
The final Pricing strategy that I would cover is that where guerrilla warfare comes. Believe me, when going against an established player, it’s not easy to carry off an affordable price position of 75-80% of the mass player. A few brands that have managed to do this well are Chic Shampoo at their 50 paisa shampoo, Parle-G biscuits. There have also been a few disasters here including the famous Tata Nano.
Now, Chic Shampoo carried this off by delivering massive scale. The legend goes that when Unilever realized the behemoth that Chic had become they were delivering more shampoo volume just through the 50 paisa shampoo that all of HULs shampoos put together. It’s the same with Parle G, most companies believe that the cost of the raw materials would be higher than the cost of the biscuit packets. Then how do such companies carry off these insanely low prices?
The game plan again goes back to the profit and loss statement. If you are not compromising on the Cost of Good or Advertising spends, the only Cost head that you can leverage is Company Overheads. What this means is that most Mass players rely on a logical cost of operations be it Sales and distribution, people costs and bonuses. You need to operate with extremely low employee costs to justify such a Price position.
Next, having depreciated assets like old & large factories also helps as long as flexibility in operation is not required. However this makes these Brands extremely vulnerable to consumer evolution.
One of the pitfalls of such a strategy was experienced by Tata Nano where positioning yourself as mass can blow up in your face if the consumer perceives you as cheap instead of as a smart choice.
There are several price positions that Brands can take in the market, however, this is a decision to be taken extremely judiciously with an eye on the total mix. A premium position requires clear markers of aspiration and demands communication. A super-premium position can often become a niche unless the consumer trigger is exploited smartly. An affordable position is not always a mantra to win unless the business model is well thought through. However, Pricing will always remain one of the most crucial decisions a business would take given the direct implication on the bottom line.
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