Sliding Down The Price Ladder

Discounts, trade-ins or plain price-cuts have always been acceptable as a short-term tactic. But when these tactics are used for the long haul, that is when it begins to put a different spin on events. Should players join the cut-price bandwagon or adopt the moral high ground and maintain a studied, almost condescending silence?

To complicate the scenario, what if an established player in an industry initiates the price cut? The other players may well like to think that the storm will blow over if they stay put within the shelter of their brands. Well, not quite.

Changing values

All price-cuts are not desperate attempts to buy market share. The price-cutter may have actually looked into the market and decided the entire value proposition of a segment or even an industry may well change as a result of the move. If that is about to happen, the older brand values will not hold. This is hardly any comfort for brand believers.

 

A distinct example is the PCL Millennium offer. In late September of last year, Pertech Computers Limited put out an advertisement offering a 100 MHz Pentium, multi-media equipped personal computers at a shade below Rs 40,000, half the actual price. This was about the time when all the computer marketers were on anti-depressants. The much-hyped Small Office Home Office (Soho) market had failed to take off despite HCL's effort in establishing a strong value offering with its Beanstalk. Apple too had not progressed very far with its Mac Performa.

Nobody understood exactly why this had happened. Few would really know and PCL would like others to believe that it had the answer. For all their needs, what the potential Soho consumer first needed was the hardware. Only then would the customer really need the software.

Obvious? Not to others, who were busy trying to bundle both. PCL just decided to go for the hardware as that was all the value that really mattered to the consumer. Customers who requested free software were firmly told about the increased end-user price. After a little pause, most them realised that all they wanted was an affordable "computer". Theirs was not to question what they would do with it once they bought the machine. Going under the Rs 40,000-mark thereafter was not a big problem.

Most of the competitors remained on the side-lines. As the trickle of customers turned to a deluge, everybody tried getting into the game. PCL came back with a counter-offer. When the dust cleared PCL had sold 20,000 machines in one month and kick-started the Soho market. Never mind if most people still use their machines to do a bit of word-processing or play Minesweeper and Solitaire. It is only a matter of time before they put it to serious use: like playing Quake.

The magic figure Estimating the probability of change in the value proposition may require good marketing foresight, but its more mundane cousin the magic price figure often does not.

Simply put, in segmented markets there are gaps between existing price points. Selecting the right gap often gives rise to demand spurts. Even a firm believer in brand values may realise that a properly planned climb-down to these price-points may be well worth the extra volumes.

In the US personal computer industry, IBM had been losing market share steadily. Most of the information systems managers were thinking twice before booking orders for IBM machines. In fact, most of IBM's customers of the PS/2 range of machines were switching to other cheaper brands like Gateway 2000. IBM's price premium for its proprietary Microchannel bus architecture (electronic circuitry to carry information between the CPU and peripherals) was not cutting too much ice with the consumers.

Over the last year or so, IBM has tried to correct this perceived sin, at least for its Thinkpad range of laptops. Realising that the customers were converging towards the $ 2000-mark, IBM introduced two Thinkpad models, 560 and 365, below this price. The market responded favourably with IBM getting back in the purchase list of information systems buyers especially the large non-profit organisations who are consistently looking to get more value for their dollar.

There is a similar case in the US videogame market. Sega had blundered in launching its Saturn game player and virtually handed over the market to Sony's Playstation priced at $299. To win back market share, Sega launched a scaled-down model of Saturn at $199. Sony stayed put at $299. As the news of Sega's comeback trail increased, Sony had little option but to price Playstation at par with Saturn, in case it frittered away the advantage.

When Arvind began retailing Newport jeans in the Indian market at Rs 399, it literally set the cat among the pigeons. In effect, Newport was nothing but a "scaled-down" pair of jeans; the absolute basic with four colours and one fit. The entire plan centred on price. A million pairs per annum and Rs 30 crore later, Arvind had just taken control of a market which was hitherto unknown. In the process it created a new segment and defined its value proposition: affordability. Trigger, Cambridge all talk price in this segment now. Nobody has ever tried talking anything else in this segment after that. The consumer is unlikely to consider anything else.

Even in the Indian colour television industry, marketers believe that the demand for colour televisions will explode below the Rs 8,000-mark. Till now nobody has been able to figure out a way to reach the magic figure, but each marketer is busy trying to find a way to reach that price point.

Of the incredibly credible threat

Keep an eye on the magic figure and/or change values, suggest experts, when confronted with an established player who is hell-bent on slashing price. A new entrant into the market would very rarely look at those options. All that the new player would look for is a foot in the door. And is probably more willing to go that extra distance.

Common sense dictates that existing players are likely to respond only when they perceive a real threat of the new entrant running away with a sizeable chunk of the market by assiduously following its cut-price strategy. Of course, the manner in which they do so will depend upon their belief about the industry. Those who believe that their branding is strong and is relevant to the industry would pay little heed to the threat. Others who believe that price really takes precedence to branding in their industry are likely to immediately respond.

When Akai started its trade-ins late last year, industry watchers were quite aware of the nature of the responses. Videocon had its value-for-money reputation to protect and was, therefore, expected to retaliate. Onida and BPL with their premium branding were expected to keep out of the fight, secure in the knowledge that their target segment was distinct.

As expected, Onida and BPL stayed put. But so did Videocon. It did not get into the pricing game. The reason was simple, although Akai's intent and threat was genuine, the way in which it was handed out was all too fantastic to be believed even for Videocon. (See box on Akai) The Akai blitzkrieg has, in fact, now prompted BPL and Onida, the two premium players, to reconsider their beliefs about the market and even consider following suit.

By disturbing the status quo and upsetting the market equilibrium, in effect, a price-cutter could actually provide insights into the relevance of brands for existing consumers and how that changes with price. Says a senior television market expert, "One believes that value is the numerator and price the denominator. Changing the former is tough and the latter easy. A good marketer will always try and increase the numerator...But sometimes when the change in denominator actually works so well, it does force one to pause and think really hard about taking the easy way out."