How does Pricing affect Business Decision Making?
Updated: Jan 30, 2022
Have you heard the recent news on why Netflix, which is the world's biggest streaming device is frustrated with India?
India's $2bn (£1.4bn) streaming market is fuelled by some 100 million subscriptions, according to Media Partners Asia. Since launching six years ago, Netflix is sputtering here.
With an estimated 5.5 million paying subscribers, the world's biggest streamer is lagging way behind its main rivals, Disney+ Hotstar (46 million) and Amazon Prime Video (19 million), according to industry estimates.
What could be the reasons for it?
Is it the pricing? As Netflix compared to its competitors is more expensive and even recently slashed its prices for all the possible streaming device plans
Or is it the relativity of the content? As suggested by many industry leaders, the content in India has not lived up to its expectations. So is it worth it for the subscribers to pay for the content they are receiving?
The main question from all of this is-How is pricing decided and how it is connected to the brand or the value a product or service provides?
Let's read what Saurabh Bajaj, one of the most renowned marketers in India have to say on how Pricing affects business decision making?
Pricing is perhaps the decision that has the most direct correlation to the business bottom line & hence the profit profile that you wish to hold depends upon the pricing decisions that you are willing to take.
If you Price too high then competition may undercut you, if you price too low, you will not have the margins required for investment. So how do marketing professionals go about making this crucial decision?
While there are several subtle nuances, let me start with the business basics, on the key pricing positions that any player in the market can decide to explore.
There are four intuitive positions that most companies may consider when they review their portfolio:
- Super Premium
Now, given that most of my experience has been in India, the most common price position considered is that at the Mass Tier, I would state examples like Good Day Biscuits, Santro, Blenders Price, Kit Kat as examples of brands that operate at healthy profits and offer their services to the vast majority of the great Indian middle class.
The next tier is Premium and in my experience, a price band of 1.2x to 1.3 x of the Mass tier is crucial to building a relevant business at a premium position. Now, this premium of 20-30% is crucial, as my empirical learnings suggest that the consumer is comparatively flexible within this price band. The consumer is usually willing to up-trade given enough reason to do so.
The super-premium band is a wide band and exists from anywhere above 1.3x to 10x of the Mass tier. However it requires providing a significantly differentiated experience and few brands, products and companies are able to carry off the experience required to charge that premium.
The final tier that I will talk about is the Affordable tier. This is when a product or business is able to offer an experience quite close to the benchmark at the mass tier at a Pricing that is 0.7- 0.8 x of the Mass tier. This typically requires quite a stretch as it often becomes a volume game at wafer-thin margins.
Rational for Mass Pricing
While most of us just look at market benchmarks while deciding to price, what is the actual rational logic that determines this crucial decision.
Pricing rationale eventually comes down to profits and most corporates would like to deliver a bottom line that is at least 2x of Bank Interest. And hence the corporate sector aims to deliver a Net Operating Income of 12 to 15%.
The Cost of Goods, Advertising Spends & Business Overheads that can be sustained for a Scale Business while delivering a 12-15% Operating Incomes what leads the Pricing for a Mass player.
The mass pricing strategy is of course very vulnerable to attacks from the top and bottom and hence requires stringent quality checks, product consistency and consistent brand building to fend off attacks from the top & bottom pricing positions.
Examples of companies that have done this well include Cadbury Dairy Milk which has been the gold standard of chocolate for the longest time, so has Good Day in Biscuits, Surf in detergents & Lux in Soaps.
The Premium Position
Usually, the most attractive position in any market is the Premium position as it enables an organization to participate in a scale business play with subtle differentiation. Also given similar Cost of Goods, a Premium position can garner as much as 4x of Profits of the Mass player at 50% of the scale
Some of the examples of products that have managed to justify and hold a premium position in the market include Cadbury Dairy Milk Silk & Dove in Soaps.
Now, this price position usually requires very substantial product differentiation as well as aggressive investment in brand building.
The visible marker of product differentiation in Cadbury Dairy Milk Silk is its position of the softest, meltiest chocolate and that of Dove is a soap with 1/3rd moisturizer.
Further, a rationale needs to be built in your mind to pay more. You buy Silk for that intimate indulgent moment where only the best will do. Similarly, you buy Dove to preserve your real, natural beauty through hydrated skin.
The product differentiation as well as the rationale to spend that 30% more needs to ring in your mind each time you buy the product.
The Super Premium Strategy
The strategy that, I have seen most often fail is the super-premium strategy, especially in the Indian context as we are as consumers, sceptical, well informed and pride ourselves on buying smart.
The moment a product breaches the 1.3x Pricing position, we instantly become skeptical and a few Brand that has been unable to garner scale in the Indian landscape at such a position includes Bournville Chocolates, Good Day Chunkies and the premium vodkas like Grey Goose.
Now, Bournville invested in some brilliant advertising touting its claims of made from pure Ghanaian cocoa and an exciting proposition of ‘You have to Earn it’.
But believe me, carrying off such a premium position even with the best product in the Indian landscape requires a fundamentally superior degree of brand building.
Another category that does this exceptionally well globally but definitely struggles in India are the vodkas. Now Vodka as a physical product is colourless, odourless and tasteless. Yet I have seen Absolut vodka doing a good job of operating at the Premium-priced position versus Smirnoff however Grey Goose at least in India struggles to hold its own.
The example of a brand that I believe has managed to carry off a super premium priced position is Epigamia Greek Yogurt versus Flavored Yogurts with a clear demonstrable claim of superiority of having double the protein of regular flavoured yoghurts.
The crucial learning in my head is that at a Price premium of 1.2-1.3x you can win versus your source of growth through physical and emotional differences.
But a Price position that is 1.5-2x of mass products you need to create a new category with new reasons for consumption.
Affordable Game Plan
The final Pricing strategy that I would cover is where guerrilla warfare comes. Believe me, when going against an established player, it’s not easy to carry off an affordable price position of 75-80% of the mass player.
A few brands that have managed to do this well are Chic Shampoo at their 50 paisa shampoo, Parle-G biscuits. There have also been a few disasters here including the famous Tata Nano.
Now, Chic Shampoo carried this off by delivering massive scale. Legend goes that when Unilever realized the behemoth that Chic had become they were delivering more shampoo volume just through the 50 paisa shampoo that all of HLLs shampoos put together.
It’s the same with Parle G, most companies believe that the cost of the raw materials would be higher than the cost of the biscuit packets. Then how do such companies carry off these insanely low prices?
The game plan again goes back to the profit and loss statement. If you are not compromising on the Cost of Good or Advertising spending, the only Cost head that you can leverage is Company Overheads.
What this means is that most Mass players rely on a logical cost of operations be it Sales and distribution, people costs or bonuses. You need to operate with extremely low employee costs to justify such a Price position.
Next, having depreciated assets like old & large factories also helps as long as flexibility in operation is not required. However, this makes these Brands extremely vulnerable to consumer evolution.
One of the pitfalls of such a strategy was experienced by Tata Nano were positioning yourself as mass can blow up in your face if the consumer perceives you as cheap instead of as a smart choice.
There are several price positions that Brands can take in the market, however, this is a decision to be taken extremely judiciously with an eye on the total mix.
A premium position requires clear markers of aspiration and demands communication. A super-premium position can often become niche unless the consumer trigger is exploited smartly.
An affordable position is not always a mantra to win unless the business model is well thought through. However, Pricing will always remain one of the most crucial decisions a business would take given the direct implication on the bottom line.
About the Author
Saurabh Bajaj is the Marketing Head for the Dairy Business at Britannia Industries Limited since September 2019. He is an alumnus of Delhi College of Engineering and completed his PGDM (MBA) from the Indian Institute of Management Indore in 2004. He has since, spent over 16 years in the field of Sales & Marketing having worked for a decade with Mondelez from 2005 to 2015, then as the Innovation Head for Premium & Luxury Spirits with Diageo for 2 years, before joining Britannia.
Saurabh joined Britannia in Sep’17 as the Marketing Head for the International Business which has offices in Bangalore, Dubai & Kathmandu where he worked on several exciting Innovations & Activations across the Middle East and South Asia. Now, he is working on an exciting mandate to scale-up Britannia’s Dairy play across India & Bhutan. Recognized as 50 Best Marketing & Communication Professionals by White Page International in 2020 & as a DMA Trailblazer Rising Star CMO in 2001.