Marketing Notes - Should you reduce prices to counter competition?

Let's take a scenario where you join a new firm and are asked to manage a brand. The brand is not doing well right now and you need to prove that you made an impact. You obviously have a limited marketing budget. After a lot of introspection you come out with two choices:

1. Spend budget on advertising

2. Spend budget on price promotion.

What would you choose?

You evaluate the two options and here is the analysis:

1. Price promotion because it will introduce trial.

2. Price promotion because it will attract switchers.

3. Price promotion because it is offensive strategy while advertising is a defensive strategy.

4. Price promotion because big impact expected immediately while advertising will be a long term investment.

5. Advertising because it will influence perception.

6. Advertising because it will create loyalists.

7. Advertising because it increases perception of quality.

8. Advertising because it will build brand image.

Now you also know that in the short run even you don't advertise for a month your sales might not be affected much. e.g. say if coca-cola stopped advertising today, would you stop drinking coke?

I am sure you will go the price promotion route. This is what most managers will do. It seems sensible. However, there is a pitfall in this strategy. It leads you to a vicious cycle.

As you drop prices, you are at par with the other low price products. There are more low price products that high price products. So, the consideration set for the consumers increases. Given a larger consideration set, the consumer becomes more sensitive to price as there is very little differentiation. The product becomes a commodity and you end up with lower margins. Lower margins mean, less cash available for advertising or adding product differentiation by virtue of R&D. So, how do you sell more product - Reduce Prices. And you are back to where you started with. The path of no return!

Marketing Notes - Slow Death of the Brand

Disclaimer: The end of the story is very grim. This real story can cause you to get a feeling of déjà vu.

This story starts in a happy world. Our Brand, called "Hit", is a high quality, high price brand in a growing market with over 30% market share. There is another competitor, with slightly inferior product and about the same market share, and the rest 40% divided between some 100 small competitors, with inferior products. Our brand was enjoying good premiums and everyone in the firm was happy.

Good time do not last forever, and enter a new competitor. The person feels there is a vacuum in the market and there is a place for a Low Price Brand. He positions his product in a low but acceptable quality and low price. This brand gains 1% market share. Hit is still enjoying life and doesn't care about a newbie. Time passed and the new brand keeps gaining the market share continuously. People start seeing the value for a low price brand the brand reaches a 10% market share. Now Mr.Hit take notice and after hours of meeting come out with a killer strategy. They can not reduce price because the brand premium will go away. So, to compete with the new product, they launch a new product called Mr. Fighter, a flanker brand. This is a neat strategy. The brand image or Mr. Hit will not be hit and the firm will be able to capture additional market share from the competitor.

Mr. Fighter does a good job and takes share from other 100 competitors and some from Mr. Hit and some from the new competitor. Now the competitor has to make the next move. Competitor already had lowest prices, wafer thin margins, so he obviously can not cut prices further. So, it decides to go to the retailers and gives them the proposition to go private label. Retailers will be happy to do that. They can squeeze the manufacturer further. Now, the ball is back to Mr.Hit's court.

Mr. Hit, now thinks that they can either let competition take the market share, because the retailer owns the shelf space, or go private label themselves. Now, Mr.Hit is both manufacturing private label and also providing trade incentives to the retailer for shelf space for the flagship brand. The margins goes down. So, Mr.Hit outsources the manufacturing and designing and is left with only the brand name.

Retailers are happy by squeezing both the hit brand and competitor. The private label products are gaining popularity because people are slowly realizing that its the same product after all and at a lower cost. In the whole value chain, retailer has the highest margins. Now, our dear Mr.Hit has also lost the design capability. The ODMs (Original Design Manufacturers) on the other hand give a proposal to retailers to manufacture multiple brands for them. They don't have their own brand to begin with and their main capability is manufacturing and operations.

So, now the retailer has high margins and also a good, better, best strategy to have various brands at all levels, i.e. entry level low quality - low price product, middle level medium quality - medium price product and also a premium brand positioned next to Mr.Hit's brand commanding high price for the high quality. With brand being the only thing left and no margins to innovate, the demise of Mr.Hit is evident. It's only a matter of how long can it take the losses, while the retailer makes merry!

That's the end of Mr.Hit! Now, the question arises that while this story is so distressing yet so true, what could have Mr.Hit done differently to stop this eminent death? While there are no straight answers to this question, one thing is clear - Mr.Hit can be saved only by differentiation and by being ahead of competition ALWAYS! It has to constantly innovate if it has to remain alive. It has to create a pull from the customers forcing the retailers to provide shelf space to this product.