Value Pricing at Procter & Gamble

Specific assumptions about the relations rose hip between footing changes and foodstuff sh are changes Table. 2 Suggested Budget Requirements Fig. 1 order hurt Result ValuePricingAtProcter&Gamble(A)3 Objective 1 Prisoners plight The P&G determine system in the 70s and 80s was oriented towards marketplace share.Please describe the prisoners dilemma in which those companies in the P&Gs markets got rewarded that maintained or addd their price promotions. For sake of discussion, let us use a single company (Unilever) as an example to exemplify how all the companies in P&Gs markets experience prisoners dilemma. Since Unilever and P&G operate in the same market, a isthmus of their actions are interdependent on one another. Initially, the two firms were engaged in a prisoners dilemma. Major moves in product, set or policy without providing their intentions to the other would go out in losses for both companies.Thus, a surprise move by any firm would yield lead to inefficiency. I deally, both parties would prefer to escape the dilemma. This swear would give birth to a cooperative set of behaviour between the two players. This cooperation however would cease if Unilever (or PG) decides to change its behaviour by increase or maintaining its price promotions when PG (or Unilever) chooses to cut punt on promotions. Such a move by Unilever would lead to the adoption of a concomitant games situation by both firms as the traditional cooperation would no longer exist.By looking forrad to the future response of PG and reasoning back to the present, Unilever decides that this approach would be scoop up for the firm. By increasing promotions without notifying PG (which is planning to cut back on promotions), Unilever whitethorn see an advantage to the firm. This is referred to as opportunistic behaviour. Unilever may have the perception of PG as being a bullying firm, and Unilever did not want to be left cooperating completely to have PG cheat. Since the two firm s were cooperating, both firms would be expecting the other to react to such a move.PG 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 suspicious how they respond, there is no doubt that Unilever would have analysed the probabilities of PGs 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, frankincense causing P&G to deliver a second punishment. There is no doubt that Unilever analysed this position of P&G and decided on the hazard of P&Gs response. Since PG has quantify in other markets, it is likely that they would respond and react. Though a reaction is lik ely, Unilever k revolutionary that its consumers are risk-averse. Thus by strike PG with higher price promotions, consumers would attach loyalty to Unilever products in front PG could come up with a strategy.If PG reacted by offering similar promotions, consumers would continue to purchase Unilever products till the prices offered by PG are low enough (resulting in lower earningss) to make consumers case their loyalties. ValuePricingAtProcterGamble(A)4 PG could however, do a number of things to overcome the risk aversion involved in Unilevers move. First, they could depone on their reputation to launch similar or better promotions, since risk aversion would be minimal as both firms are long-familiar 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 econo mic advantage in at least one of its markets. Perhaps P&Gs reaction would allow Unilever to go ahead and capture new markets while PG counters this initial move. Unilever decided to cease the cooperative strategy and made an opportunistic move by offering higher price promotions without notifying PG.Before doing so, it was imperative that Unilever analysed the probable reactions as well as, the results of these actions. Though it would likely illicit a tit-for-tat response, Unilever felt that the probable outcome would be advantageous enough to cease the cooperative strategy. Unilevers approach demonstrates an ability to look ahead and reason backward to select a move that will jock them to gain market share at the cost of P&G (or basically any company which chooses to cut back). Objective 2 Organizational ProblemWhich was P&Gs organizational problem that enforced these strong promotional activities? Each business family line which consisted of a collection of up to 3 disfigureme nts was headed by a widely distributed Manager. The General Manager of each category had possessership of his/her suffer Profit and Loss statement. Within the category each brand was managed by Brand Managers. Each brand group was liable 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 disbursement 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 years 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 gainfulness of the brand, since they were not the ones who would beValuePricingAtProcter&Gamble(A)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(p) this particular organization and incentive structure. Objective 3 Risks of implementing Value Pricing The category manager for dish care, John Bess, was considering the introduction of survey based determine (= fair price lower list pricing than before, but less promotions).Please describe the major risks for P&G in 1991 in case of implementing abide by 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. Operational Challenges Applying and implementing the value pricing across the company shall certainly have the 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. 2.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. make it more challenging to implement the value pricing. Even if executed, it will be really difficult to create and maintai n a significant price view in the consumers 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 target of providing value pricing to the customers.This may also lead to fluctuations in prices. 4. 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. 5.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. 6. 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 & Gs own query showed that the ValuePricingAtProcter&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. 7. 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. 8. Loss of Shelf Space Prominent visibility and placement of a product is an important means 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 pageant allocation as no emphasis on the same is being laid in value pricing. 9. Fall out impact Introduction of value pricing is a significant decision for P & G and shall require complete 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 lo yalty at risk.Objective 4 Short Proposal for Value Pricing In the hot chocolate market, P&Gs 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 java category, we still think this method can help us to achieve higher profit, based on reasonable assumpti ons and planning.Therefore, we work out a Value Pricing protocol for the coffee product, which is as follows ValuePricingAtProcter r&Gamble(A A)7 Part I Basic Assumptions about the ma I arket reacti towards price changes ion 1. Fr rom the artic we know that the consumers in the coffee segment is highly sens cle, w n sitive to pric Therefore the ce. e, ma arket reactio to price ch on hanges should be remark kable. As price goes down, the market share should incr s m e rease.When the price d n decreased to a certain am mount, which can h att tract the mos sensitive consumers to change, th market sha should in st c o he are ncreased by the largest p percentage. T Then, the increasing rate should be down. e He are the sp ere pecific assum mptions abou the relatio ut onship betwe price cha een anges and m market share changes Ite ems Unit Price Changes e Market Sha Changes M are s Senario 1 -10% +7% Senar 2 rio -15% % +15% % Sena 3 ario -2 20% +1 18% Se enario 4 -25% +21% + Senario 5 S - 30% +23% Senario 6 -35% +24%Table Assumpt e. 1 tions about th relationsh between price changes and mark share cha he hip ket anges 2. As A in value pr ricing strateg the prom gy, motion should be decreas along with the price adjustment, to find the d sed op ptimal list price of coffee we set up a 10% decre e ease in mark keting expend diture in all scenarios, w which is att tainable base on our co ed ompanys con nditions. 3. W simply ass We sume the ma arket size, de livered cost are not chan t nging. Part I Value Pr II ricing Proce Please re the attac ess efer ched Excel f file. Part I Value P III Price result Please refer the machine-accessible Excel file. r d Fig. 1 V Value Price R Result Here b Value Pri by icing, we fin the best list price for o coffee, w nd our which is 47. 8 And the d 81. derived prof based on o fit our assum mptions will b 71. 71, wh ameliorate by 28. 75% be hich ed %. ValuePricingAtProcter&Gamble(A)8Part IV Budget requirements From the article, we already knew that feature advertising is important to market share, so we will not cut the Feature display part in total marketing expenditures. We try to control the un-critical part to realize the deductive reasoning in marketing. Here are the suggested budget requirements Total Budget for marketing expenditures Advertising Coupons Off Invoice/Feature display 38. 55 35. 15 265. 67 339. 37 Table. 2 Suggested Budget Requirements