Neslin on Procter & Gamble's Value Pricing Strategy
by Jenn Bollen and Greg Thomas
A. Neslin, Albert Wesley Fry Professor of Marketing at the Amos
Tuck School of Business at Dartmouth College, delivered the February
2005 ZIBSForum at Emory University on how Procter & Gamble instituted
a "value pricing strategy" in the early 1990's.
& Gamble made dramatic and long-term changes in its pricing and
promotion strategy during which it boosted advertising while simultaneously
curbing its distribution channel deals (in-store displays, trade
deals), and significantly reducing its coupon promotions.
the early 1990's Procter & Gamble made dramatic and long-term
changes in its pricing and promotion strategy. Procter & Gamble
(P&G), a leading consumer packaged goods producer, instituted
a "value pricing strategy" during which it boosted advertising
while simultaneously curbing its distribution channel deals (in-store
displays, trade deals), and significantly reducing its coupon
promotions. This grand experiment leads us to a whole host of
questions. What impact did the strategy have on brand loyalty?
How did competitors respond? What was the "bottom line" impact
on market share?
response to these questions, Scott A. Neslin, the Albert Wesley
Fry Professor of Marketing at the Amos Tuck School of Business
at Dartmouth College, enlightened us in his presentation at the
ZIBS Forum held in February. Scott Neslin performed extensive
analysis on the topic along with colleagues Kusum L. Ailawadi
and Donald R. Lehmann. For our ZIBS Forum, Scott revealed the
secrets of their investigation, and this report covers the salient
points he covered.
inspired P&G to initiate this value pricing strategy? First
was logistical efficiency. P&G was concerned with the cost
of administering promotions, and the effect of up-and-down swings
in demand on the production system. Second, P&G was concerned
with the impact of promotions on brand loyalty, fearing that on
one hand they attracted "cherry-picking" bargain hunters
who could care less about the brand, and on the other hand they
weakened the loyalty of their core customers. It is also thought
that one of the prime architects of the strategy, senior executive
Dirk Jager, personally disliked coupons with a passion. These
factors inspired P&G to break with standard marketing practices.
As a result, over the course of six years (1990 through 1996)
P&G reduced its coupon expenditures by over 50%, reduced its
distribution channel deal expenditures by 20%, and increased its
advertising expenditures by 20%. This was truly a contrarian strategy
as during the same period general market trends showed an increase
in promotion (deals and coupons) by 15% and a decrease in advertising
were the goals of value pricing? First, it sought to improve efficiency.
The administrative and production costs for promotions, deals,
and coupons were becoming increasingly expensive and cumbersome
for P&G, distributors, and retailers. Second, since the theory
was that coupons and deals only invited brand switching and destroyed
brand loyalty, cutting back on deals should leave P&G with a stronger
brand franchise. And to top it off, coupon fraud was also growing
at this time with supposed nefarious links to organized crime
and terrorist funding. Cutting back on coupons would obviously
sever this link.
P&G's Value Pricing Strategy, Scott Neslin and his colleagues
investigated how their strategy affected brand loyalty, whether
their customer base increased or decreased, how the competitors
reacted, and how the strategy affected market share.
determine this, Neslin broke market share into three components:
Penetration (PEN), Share of Requirement (SOR), and Category
is the percentage of category buyers who buy the brand at least
once; SOR measures brand loyalty and is expressed as the percentage
of category purchases in which the consumer chooses the P&G
product, among those who purchase the P&G brand at least once;
is an adjustment for heavy and light users. In summary, PEN
is basically how many customers you have;
is how frequently these customers buy the brand (a measure of
loyalty), and USE is whether the brand's customers are disproportionately
light or heavy users.
the following formula you can equate market share:
Share = PEN x SOR x USE
could conjecture that, with their new pricing strategy, P&G's
PEN would decrease, but SOR would increase more than PEN and improve
created separate regression models for PEN, SOR, and USE. To achieve
this, he used P&G's price, promotion, coupon, and advertising
expenditures and the competition's price, promotion, coupon, and
advertising expenditures as independent variabes. He quantified
these as the net price paid for an item, percent sold on deal,
percent sold with a coupon, and media advertising dollars. Neslin
was unable to include a specific measure for distribution but
distribution is captured indirectly in the catch-all "error
term" of the model. Neslin's analysis shows that although
price, advertising expense, deals, and coupons (from both P&G
and competitors) affect PEN, SOR, and USE, price has the largest
affect on the three market share components. Most interestingly,
advertising had little effect on all three components, and deals
and coupons actually a slight positive impact on SOR. While this
is contrary to the view that promotions destroy brand loyalty,
it may simply be due to the fact that promotions keep consumers
in the brand, whether because they love the brand or because they
can buy it at a decent price.
1990 -1996, the net price paid by consumers of P&G products
increased 20.4% (due to the decrease of coupons use by 54.3%,
and reduction in price cuts). Meanwhile P&G increased advertising
by 20.7%, and decreased channel deals by 15.7%.
was the competitive reaction? During the same time period, the
overall competition's (including companies such as Colgate, Unilever,
and Gillette) net price paid increased 10%, advertising increased
6.3%, deals increased 13.1%, and coupons decreased 17.1%. Of the
three competitors, only Gillette lowered prices and it increased
coupons use by 127.6% -- far more than Colgate. Overall, the competition
did not completely cooperate with P&G, but neither did it
take full advantage in a mad grab for market share.
was the total impact on P&G? P&G's Value Pricing Strategy
showed no change in share of requirements or category usage, but
it did end up with a reduced penetration rate, which declined
16%. This was because the cut in promotions resulted in fewer
consumers buying P&G brands, and neither the cut in promotions
nor the increase in advertising had any appreciable effect on
SOR. Overall, P&G's market share decreased 16%. Although
P&G lost market share, it is possible that its profits remained
stable or even increased. It lost 16% of share, but made up for
this through increased prices 20%, a lower cost of good sold,
and efficiencies in production. However, the increase in advertising
expenditures may have wiped out most of the cost savings. Despite
gain or loss in profitability, P&G lost their strategic and
esteemed position as the market leader in the consumer packaged
goods industry. Traditionally, P&G had a sharp focus on market
share leadership as the ultimate metric of success, and yet for
the first time since the 1950s, Colgate overtook P&G's Crest
as the market leader.
happened to P&G's theory that price promotions reduce loyalty?
Was this myth or fact? Analyzing P&G's value pricing strategy
shows that promotion cuts decreased penetration but did not dramatically
increase loyalty. So, P&G's initial beliefs were myths indeed.
Additionally, increasing advertising had little effect on market
share. Why? When you are the market share leader the effect of
advertising is diminished. Market share leaders already have high
awareness levels, and unless your advertising provides new compelling
reasons to buy (usually rooted in innovative product differentiation)
there is little upside beyond maintenance advertising.
was the effect of the competitive response? The competitors reacted
to P&G's strategy in a way that cushioned P&G's loss -
the competition could have destroyed P&G, but P&G's losses
were mostly self-inflicted. Of the competitors, Gillette was the
only one to take a contrarian strategy and was fairly successful.
What do you do about sharp competitors like Gillette? As we saw
recently, P&G decided to buy this one.
sum, sustained cuts in promotion result in lost share in the long
run. Sustained mass advertising expenditure increases for mature,
high share brands do not pay off in the long run. Mass advertising
is better suited for immature, low share brands. Finally, competitors
may not "eat your lunch" if a company chooses a strategy
that makes them vulnerable. The competition likely faces the same
challenges as your company and may follow suit with policy changes.
modeling is a powerful tool. Response modeling entails using mathematical
models to translate the rich market environment into mathematical
equations in an effort to quantify the impact of marketing initiatives.
Modeling competitive market response to major policy changes is
important to understanding the long-term results of those policy
changes. The next major challenge for marketers is predicting,
in advance, how the market will react to future policy changes.
When a major policy change is implemented, it fundamentally changes
the market; the rules of the game are changed. Therefore, it is
inherently inaccurate to predict the results of major policy changes
based on historical data because appropriate data does not exist.
is interesting to note that P&G's value pricing strategy is
quite a misnomer. During this period many stores were switching
to EDLP (every day low pricing) policies, which meant that consumers
would save on their overall purchase without having to deal shop.
In contrast, P&G strategy essentially was a disguised price
increase; coupons were cut by 50%, which contributed to an increase
in the customer's price paid by 20%. It is possible that P&G
lowered their wholesale price, but the retailer only enjoyed higher
margins and did not pass the savings on to the customer. Another
possibility is that retailers lowered retail prices consistently,
following P&G's decrease in wholesale price, but once promotional
trade deals are factored in those everyday lower wholesale prices
did not result in a lower total price paid. For example, if P&G's
old price was $20, but gave deals of $15, at which price 90% of
purchases were made, the wholesale price equaled $15.7 (.90*$15
+ .10*$20). If P&G set a "Value Price" point of
$18, but 100% of purchases were made at that price, the retailer
enjoyed no cost savings-only a cost increase. If P&G had truly
offered price cuts, their results may have been much different.
insights into P&G's grand experiment demonstrate to us the
importance of promotional pricing, and the diminished power of
mass advertising for high share players. Analysis of P&G's
value pricing strategy allows us to see how major long-term policy
changes, not short-term marketing mix changes, affect market share
and competitors' reaction. Studying P&G's value pricing strategy
offers the unique opportunity for marketers to analyze major policy
changes, obtain clearer understanding of how marketing mix changes
affect brands, learn about long-term impacts of marketing changes,
and inform future policy decisions. And it is also important to
note that success can be measured more than one way. In essence,
the P&G grand experiment may have been successful when measured
by profits, and at the time those profits were being used to invest
in new innovations. However, for a company that traditionally
measured success by volume (market share) its value pricing strategy
truly had a large enough adverse impact on share that it was eventually
Ailawadi, Kusum L., Donald R. Lehmann, and Scott A. Neslin (2001)
"Market Response to a Major Policy Change in the Marketing
Mix: Learning from Procter & Gamble's Value Pricing Strategy",
Journal of Marketing, (January) 44-51.
Baohong, Scott A. Neslin, and Kannan Srinivasan (2003) "Measuring
the Impact of Promotions on Brand Switching When Consumers Are
Forward Looking", Journal of Marketing Research, (November)
Kusum L., Praveen K. Kopalle, and Scott A. Neslin (2005) "Predicting
Competitive Response to a Major Policy Change: Combining Game
Theoretic and Empirical Analyses", Forthcoming Marketing