Virtual Reality!

Its entire trade-in offer works on the concept of a 'virtual' price-cut. This involves a delectable combination of financial jugglery and psychological illusion. The trade-in has discrete financial chunks which are made to appear as one big discount through the communication.

To understand how it works, let us take the 21-inch CTV segment. One of the established players, say BPL, has its FHR model in the same segment priced at approximately Rs 20,000. The dealer margin on this set is about Rs 3,000.

The competitive marketplace often prompts the dealer to give a discount from his own margin. The size of this discount depends upon the bargaining skills of the customer, and can range from Rs 1,000 to Rs 2,000. Assuming that the discount is Rs 2,000, the final outflow for the consumer post-discount is Rs 18,000 (Rs 20,000 less Rs 2,000).

 

Now for the same 21-inch TV, Akai fixes the retail price at Rs 24,000. The Akai dealer keeps only Rs 1,000 of his customary Rs 3,000 margin and passes off Rs 2,000 to the customer. (The logic behind that will become apparent in a while.) Since it is a trade-in offer, the customer lugs in his old TV which is worth about Rs 4,000 in the second-hand market. So the true value of the discount till now is Rs 6,000 (Rs 2,000 from dealer plus Rs 4,000 for the old TV).

Now recall that Akai's 21-inch set was Rs 4,000 more than the comparable BPL FHR model. This is a purely notional increase which the company promptly passes on to the customer. The total benefit to the customer now stands at Rs 10,000 (Rs 6,000 plus Rs 4,000 off the actual MRP) over the retail price of Rs 24,000. So the customer pays Rs 14,000 for the new set. This is the financial component of the offer.

Here is the psychological component of the offer. The offer is advertised as follows: Exchange your old colour television for 21-inch Akai colour TV and get Rs 10,000 off. An average consumer knows that his seven-year old set would not fetch more than Rs 5,000 were he to sell it in the second hand market. This offer of Rs 10,000 gives the consumer a feeling of having disposed off his junk set for a fabulous price that he could have never imagined. In short, the customer's decision-making process is not centred on the purchase of the new TV, but the disposal of the old TV.

Once the customer sees the advertisement he never really tries to compare the features of the new Akai TV with a new TV of any other established brand. The illusion of price-cut is just too strong. While the consumers were lured by the fantastic nature of the offer, its competitors were dulled into disbelief. By the time they realised the threat was real, Akai had grown its market share in the Rs 3,000-crore CTV market to over six per cent from 0.4 per cent in the beginning of 1996.

That leaves only the question of the Akai dealer's low margins. The reason is simple. The dealer agrees on Rs 1,000 margin because Akai stocks move fast. The dealer in the same time-frame (of about 14 days) can sell almost four to five (Rs 4-5,000 @ Rs 1,000 per set) sets compared to one or two of the other brands (Rs 2-4,000 @ Rs 2,000 per set). The faster stock-turns protect the Akai dealer's margin.

Can others match the offer? You bet. Assume that your BPL dealer buys your old CTV for Rs 4,000. Deduct this amount from the BPL FHR's price of Rs 18,000 mentioned earlier. The price to you is Rs 14,000. Same as that of Akai!

So why do you end up buying the Akai set? To figure that out, take this quiz: train A takes 80 minutes to travel a distance, train B takes one hour twenty minutes. Which one will you prefer?

Now this concept is so well-associated with Akai

that when BPL actually tried this technique in Nagpur, nobody believed it.