Monday, June 18, 2012

Price Sensitive

Brand A, is a mature brand and has a strong following. Brand A customers have a strong preference of that product and are willing to pay for it. The premium they pay for Brand A is part of the value of that brand. If enough loyal customers routinely buy that product, Brand A will be able to continue to invest in those things that create a preference in the first place. Profit is in that equation as long as Brand A can sell well enough to maintain a healthy market share. Consumers are always challenged to consider alternatives. So Brand B enters the market. Brand B is a parity product that aggressively uses price to obtain market share. The gamble here is that enough of the Brand A consumers will consider the lower cost alternative but Brand B cannot maintain the lower price strategy. (Eventually Brand A and Brand B will cost the same.)

Brand C enters the mix. Brand C is cheaper. It is less expensive to produce and It doesn’t pretend to deserve a premium price. Now consumers will have a lower cost alternative. The good folks who bring you Brands A and Brand B have to evaluate their relative positions. Brand A and Brand B want to continue to battle for the premium price position and Brand C believes a reasonable share of the target customers will accept the compromise. Brand C believes if it can capture 40% of the market they will make an acceptable profit. Brand A and Brand B both believe 50% share is needed to survive and grow. If those assumptions are true someone will have to lose.

Brand A To respond to competition and avoid lowering its price, Brand A decides to increase its advertising to reinforce messages of quality ingredients and superior performance.
Brand B To obtain market share Brand B reduces price during promotional windows and limits advertising to price promotions only - Buy One/Get One, 50% off coupons etc.
Brand C No advertising but aggressive in-store merchandising - end aisle displays and signage.

 Given the price strategies above, who do you think will prevail among these three brands? 

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