Pricing need not flow from Costing !

We were at the factory of this new client we were working with. The Production Director was waxing eloquent about the gleaming new plant and the tremendous inputs the new product was getting from everyone in the factory, from the design team to the procurement team to the CEO of the company. We started talking about the competitive brands this new product would have to unseat and discussion veered towards the importance of pricing in the Indian market and the price that this new product will have to sold at. At this stage the factory manager bust a fuse, “How can you compare our product to that competitive brand? Do you know that we put so much more of steel into our product? And so much more of other electronics and plastics?”. Having worked in manufacturing industries in the past I realized we were getting into turbulent waters of marketing vs supply chain, we  quickly changed the topic, thanked him for his hospitality and congratulated him profusely on the great manufacturing plant he had built.

Back in office as the team started assembling to discuss the brand communication plans, the price question kept coming up. Should price be worked out after all the costs are added up, margins worked out? Or should price be decided from a completely different approach?

The big question was: Does the price a consumer is willing to pay for a product or service got anything to do with cost of manufacture/delivery ?

As it happened the senior management of the company figured out that these two issues may be quite unconnected.

Ideally price should be arrived at first from a consumer view point and then cost should be incurred based on the price the consumer will pay for the product [yes, I know Steve Jobs had his own ways of arriving at pricing and product design, but this is not an analysis of Apple’s pricing strategies]. One other variation to this is to say that we will sell at this price for now and incur a loss. As volumes grow, we will slowly take up the price. An alternate approach is that we hold the price as volumes go up, but our costs will keep coming down and we will end up making a tidy profit in two or three year.

Look at some big brand success we have seen in India. Nirma figured out that there is a need for an economical detergent powder, they fixed the price and then decided to work out the cost they will incur on raw materials, manufacturing, duties etc. They managed to do it successfully with washing powders and soaps. But failed to get to a good formula for shampoos and toothpaste. I suspect they would have succeeded with toothpaste and shampoo, if they had managed a different way of approaching the pricing equation. To those of you wondering if I had lost it, let me remind you that for many years in the mid 90s Nirma Beauty Soap was a formidable No.2 to Lux Beauty Soap in tonnage terms. Godrej No.1 with its bundled soap offer had provided a clue on how to offer a consumer price advantage by doing bulk packing.  

Coming to the latest sensation Patanjali. Once again we are seeing a sensational price play across all products. Many of the products are priced around 20 to 35% less than the leading competitor. But the biggest product in the Patanjali basket, the Cow Ghee is actually priced at a premium to the leading brands; and wonder of wonders Ghee is reported to account for over 35% of the total sales of Patanjali. So is Baba Ramdev pricing legacy [natural goodness] products at a premium knowing that in those categories his brand halo will pull the brand through, but opting for a discount pricing where he is not sure of his brand pull? We will have to wait and see how the Patanjali game plays out.

The online players have used pricing in somewhat strange ways. They have used price as a big bait to get buyers to move from the joy of real shopping to the ecommerce way of shopping. And they have created a huge movement that is now hitting a speedbump. In the milieu of endless discounts and price cutting there are a few online players who have been able to charge a premium for their services. Book My Show is a polestar in that genre. By tying up the supply side economics [movie tickets] they have created a walled garden. Movie lovers are happy not only to pay full price using their credit card, but also pay an extra service charge. Unfortunately there is a disrupter who is offering cash back on first run movies [Rs 100 cash back on Salman Khan’s Sultan, if you please]. So may be value destruction will start in movie tickets as well or will the walled garden player mange to hold off the evil forces at the gate, only time will tell. Ola a highly successful cab aggregator has managed to change behavior and is now targeting 50% off pricing during off peak times. I suspect many more such innovative plays will happen in the online space.

In a country like India with its hyper value conscious consumers, it is foolhardy not to think of pricing from all angles, and not just from the cost of manufacture and raw material costs. Successful marketers do not leave the pricing decision to the cost-accountants. And therein lies their success secret.

Ambi M G Parameswaran is Author, Brand Strategist and Founder Brand-Building.com; formerly CEO / ED and later Advisor at FCB Ulka Advertising, he is currently serving as the President of Advertising Agencies Association of India. He will take stock of consumers, brands and advertising every month. The views expressed are personal.

 [The author’s latest book : Nawabs Nudes Noodles looks at India Through 50 Years of Advertising. The book, published by Pan Macmillan went on sale in June.]

The original article appeared in The Mint on 12 July 2016