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Have consumer firms lost their pricing power?
September 15, 2004
Jagdeep Kapoor, Managing Director, Samsika Consultancy
Do companies have the power to price? Yes.
Do companies exercise that power to have pricing options? In most cases, no.
Having the power is different from using the power. Companies have the power to exercise the pricing options but companies are not exercising pricing options and, therefore, the power is being lost by non-utilisation.
Thus, I would say the power to exercise pricing options is being lost by companies.
Why is this is happening? There are five reasons. Companies have the ability and the power to exercise pricing options but are not using them fully. The only direction that companies seem to move in is downward.
Consumers buy brands because they desire trust, and trust comes from stability, not volatility of prices. Companies need to have a long-term view of prices for brands rather than behaving like commodities. Stability in the pricing strategy would ensure long-term trust and help companies use their power to exercise pricing options.
Companies must realise that when they reduce price and over-discount instead of gaining customers, they may be losing credibility. This is because customers wonder why they were charged such high prices for so many years. They also suspect the motives of the companies and start doubting the current or future quality of the brand.
Companies should use their power to exercise pricing options by using various levels of affordability. Affordability does not necessarily mean lower prices; it means what is it that customers are willing to give in terms of money versus what the customer is about to get in terms of benefit.
People do not buy products or services; they buy brands. People do not buy features; they buy benefits. If companies want to use their power to exercise pricing options, they should increase the perceived value rather reduce prices.
Perceived value is a mixed of tangible and intangible benefits that the consumer gets from the brand. Companies have and should use the power to exercise pricing options by increasing perceived value.
To be able to have an effective pricing strategy, six Cs have to be considered. Each of these is crucial in deciding the final pricing. The first is cost. The approach to pricing could be based on total cost or direct cost, especially if a new market has to be entered or if brands have to be exported.
The second important factor is the customer. Customer perception and expectations determine whether a brand will be successful or not.
For example, the pricing of Taj or Oberoi Hotels is extremely premium. If the pricing is brought down substantially, the up-scale consumer may opt for another premium hotel and a lower segment may start using the hotels' services.
Third, competition plays a major role in deciding the pricing of brands. In case of competition, there could be a limit price or a switching price. The limit price is the highest price that could be set without attracting another entrant into the category, whereas switching price is the highest price that could be set without customers being tempted to switch to other brands.
Fourth, the aspect of coordinated pricing has also to be kept in mind. Often, substitutes or complimentary products have to be priced intelligently and in a coordinated manner. Fifth, channel (distributors and retailer) margins play a key role in determining the pricing.
And finally the company's internal goals decide pricing. These could be either having minimum, steady, or high future earnings.
Ajay Kapila, VP, sales and marketing, Electrolux Limited
The consumer durables industry has gone through many changes in the past decade. From a host of multinational companies entering the Indian markets to fast-changing consumer preferences to the increase in the demand for value-added products, increased awareness of brands and so on, the industry has seen it all.
And technology is set to play an important role in shaping the market, and indeed acting as one of the key differentiators.
Indian consumers today are much more aware and knowledgeable than ever before. They're younger; admire capitalism; watch more than a 100 satellite television channels; they are technology savvy; and they harbour no feeling of guilt whatsoever about spending or about their affinity for a modern, western lifestyle.
With so many offerings and choices available in the market today, product selection has become easier and faster. Consumer durable companies, therefore, need to employ innovative mechanisms for reaching out to these customers, so as to be able to position and sell their products in larger volumes to attain greater profitability.
Competition is a natural phenomenon in the consumer durables industry. Companies in India have realised this fact and have positioned themselves uniquely enough to reach out to their customers.
In a way, today, each consumer durable company in the country, irrespective of its products' portfolio and size, has a distinct positioning. Consequently, they reach out to different segments of the larger customer set.
Some years ago when the market was as competitive and consumers not too exposed to media and the latest product technologies, it was quite natural for companies to have a greater control over pricing. At the same time, this trend is not unique for consumer durables but can be seen across product categories such as automobiles or telecom services.
But with increased competition, consumer durable companies have indeed had to re-look and re-work their strategies, both for product development as well as their marketing and financial planning. A brand and the value it delivers are still as important as ever.
The customer doesn't pay for the product but for the brand. The expectation of the consumers from brands has also increased greatly, which is why companies like Electrolux spend a lot of their time and resources on consumer research.
Since this industry is technology-led, there is always scope for product differentiation and for providing that extra brand value or technological edge to the customer. And today's savvy customer is willing to pay for that extra value.
Yes, it is true that Indian marketplace is temporarily seeing a price war because of low market penetration. But this is most definitely a temporary phenomenon. Also, it would not be fair to say that the whole industry is engaged in a price war.
Certain companies, led by their huge volume aspirations, are reducing prices at the cost of the value, which is posing a challenge to the brand value. Creating price fluctuations in the marketplace is not good and certainly cannot be a long-lasting strategy, from the customers' as well as the companies' point of view.
But as I said, it is just a temporary phase and as the market will expand, the penetration, too, will increase. As a result, we will eventually see this trend dying down. What we will see is more and more companies focusing on offering innovative products to expand the market further rather than simply relying on the pricing.In the end, it will be right to say that consumer durable companies in India have learnt to co-exist while competing with each other. Competition is healthy for the growth of both the industry as well as individual companies. Competition in the marketplace, in fact, brings the best out of companies, which augurs well for the customers at large.