Is Procter & Gamble Right in Resorting to Price Cuts to Revive Its Flagging Sales?
Promotional techniques are the primary instruments aimed at increasing sales. When the volume of sales drops significantly, manufacturers often decrease the price of their products to stimulate interest. Spurring customer motivation to buy the company’s products is commonly done through price-based incentives. However, premium promotions are also becoming increasingly popular. For instance, some companies offer gifts when a purchase is made. However, such a strategy might not be relevant for Procter & Gamble because the cost of a reward might surpass the price of the product itself. The latter strategy is appropriate for companies that offer high-priced goods and services. Procter & Gamble’s products, such as shampoos and detergents, have a relatively low price, and it is inefficient to offer gifts with them. Therefore, it can be considered that lowering the price was the only option the company had to compete with private labels and small local manufacturers.
Price cuts are also the most effective strategy despite the growing popularity of premium promotion. A study conducted by Foubert et al. (2018) was aimed at determining the efficacy of monetary incentives and premium promotions. The results demonstrate that gifts, despite leading to positive subjective customer reactions, are less likely to stimulate purchase activity compared to simple price cuts (Foubert et al., 2018). Instead of offering a 50-cent gift, it is much more beneficial to lower the price by 50 cents. Therefore, the decision of P&G is the most appropriate, and their statistics show that it was a correct decision. The company was able to increase its sales and compete with emerging companies that were offering their products at low prices. Another scientific piece of evidence that supports the claim is the study of Kim and il Kim (2016). They determined that temporary price cuts lead to a spillover effect in other product categories (Kim & il Kim, 2016). In other words, by lowering prices on detergents, P&G might have stimulated sales of their diapers and shampoos.
Comment on Procter & Gamble’s Shift to a ‘Volume-Based’ Company from a ‘Value-Based’ Company
Historically, P&G had focused on the quality of their products and had attempted to build a brand image of a premium-product company. However, because of pressing competition, they had to switch from being a value-based company to becoming volume-based. This decision was correct because of the type of products they were selling. Several factors may help explain this decision. First, everyday products such as toilet paper and detergents are not the things people would want to spend a fortune on. Value-based pricing is more appropriate when selling services or products that have a high average price, such as cell phones (Raja et al., 2020). However, when a product is frequently bought, a consumer imminently considers the price in the first place (Raja et al., 2020). The second reason is the education of target consumers and users.
While P&G had attempted to develop customers’ perception of value, most consumers use detergents and other P&G products in households. Not all people care about the quality of the chemicals a detergent is comprised of. Instead, the surface area which can be cleaned using it is much more critical. In summary, P&G’s decision to switch from value-based pricing to a volume-based model is justified. P&G operates in product categories, where volume is much more critical than perceived value. Furthermore, P&G was at risk of spending more money trying to build a premium brand image than it would cost to increase production volumes and decrease prices.
References
Foubert, B., Breugelmans, E., Gedenk, K., & Rolef, C. (2018). Something free or something off? A comparative study of the purchase effects of premiums and price cuts. Journal of Retailing, 94(1), 5-20.
Kim, H., & il Kim, K. (2016). Spillover effects of temporary price cuts: Evidence from US scanner data. Journal of Economic Theory and Econometrics, 27(1), 16-33.
Raja, J. Z., Frandsen, T., Kowalkowski, C., & Jarmatz, M. (2020). Learning to discover value: Value-based pricing and selling capabilities for services and solutions. Journal of Business Research, 114, 142-159.