Behind Crest White Strips Multi-Version Strategy

P&G practically created the teeth whitening white Strips category. Introduced under the powerful Crest brand it helped create new revenue stream  after all  it is not easy to grow 10% YoY when each brand bring in $1 billion revenue. The part that interests and impresses me the most is their multi-version pricing for the White Strips category. While I expressed concern about P&G’s other brand Downy’s horizontal product line extensions, Crest White Strips serve as an example of effective pricing  strategy, tactics and execution.

Take a look at the Crest White Strips page from P&G and here are some insights on their versioning strategy:

Side bar – Value Tag: For brand managers from Colgate-Palmolive and Unilever this article is worth $9999 to you.

  1. If one price is good two are better and four are even better if designed and positioned correctly. Crest offers four different versions of the product, offering increasing benefits from low to high end version.  This is vertical product line extension.
  2. Versions are designed in such a way that customers self-select  themselves to the right one (Second degree price discrimination).
  3. The lowest priced version is the Classic at $24.99 and the super premium version ($44.99) is the Crest Advanced Seal, introduced in early 2009.  That is a $20 price differential between the lowest and highest product creating great profit opportunity from up-selling.
  4. The price jump is non linear and reflects customer’s diminishing utility. From Classic to Premium it is a $10 jump indicating customers assign most value in this upgrade. Between other versions it is $5 jump indicating customer utility flattens out or grows slowly as they move up the versions.
  5. Note that the listings are benefits and not product features. Customers care about benefits  and not about the features – compare this to many of the technology offerings that simply list feature differences across versions.
  6. Look at  the images showing the packages. These are designed to visibly show that not only are these versions different but also  help “tangibilize the intangible” (Ted Levitt).
  7. In behavioral economics, the effect of  presence of high priced versions has been extensively studied. The netof those findings is that while these may not sell much, the  presence of high priced versions help improve customer willingness to pay for the other versions. But that is not the case with Crest Advanced Seal. I make this claim based on the number of reviews and rating for this product.
    Versions Reviews Rating (on a scale of 5)
    Classic 58 4
    Premium 34 3.75
    Pro Effects 17 3.5
    Advanced Seal 77 4

    If we use the number of reviews as a stand-in for the market share, Advanced Seal, despite being the super premium version, is their most popular seller. The ratings also indicate that customers are happier with their super premium version. At $20 price premium and arguably not much cost difference this is a big contribution to their profits.

  8. Their Pro Effects, scored the least both in terms of number of reviews and rating. Until P&G introduced Advanced Seal an year ago, this was their most expensive version. We can hypothesize that it served then as the expensive decoy but did not add as much value to the customers and hence did not get market share. Going forward we should expect to see P&G allocating fewer marketing resources to this version and keeping its price levels.
  9. All their prices end in 99, as seen again in behavioral pricing literature this is a good tactic. It is easy for everyone to have prices end with 99 but it takes marketing strategy and a clear understanding of customers to maximize profits.

Overall Crest White Strips serve as a great example of marketing strategy, versioning and pricing for profit maximization done right!

Profitability of Product Proliferation – The Case of Downy Simple Pleasures

Update 3/26/2013: P&G recently discontinued Downy Simple Pleasures and relaunched it as Infusions

Recently P&G has been promoting a new line of Downy fabric softener called Simple Pleasures. This is a premium product compared to their regular Downy line and it offers at least five different scent choices. On top of that Downy brand is running a contest to generate more scents.

How many Downy scents does the market need or can support?

downy_simple_pleasures Brands have been competing for the shelf space and wallet share of customers by expanding their product line both vertically and horizontally. The reasoning is finding every niche and filling it with a version at a price customers are willing to pay. That is the reason a typical supermarket stocks 30,000 to 40,000 SKUs. That is the reason you see raspberry, strawberry, key lime pie, vanilla and all sorts of yogurts. While conventional wisdom may say to the brand managers to keep expanding, data show otherwise:

  1. Customers do not value different variations  (colors, scent, flavors)within the same product line differently
  2. Retailers cannot set the prices differently for strawberry flavored vs. raspberry flavored yogurts
  3. Increasing products horizontally (color, scent, flavors) do not result in increase in market share or profits

In an NPR story on Walmart earnings report, they interviewed a few customers shopping at a Walmart. One of them said,

Ms. HAVENER: Do we really need to carry 19 different tackle boxes, or do we need to carry six different tackle boxes? And were so really looking at clarity of offering.

This is one data point, but the broader story line is Walmart has been systematically reducing SKUs, decluttering shelves and pushing back on manufacturers on number of SKUs they want to stock. Walmart is the leader in retail market share and it is by no means alone in pruning shelves. Retailers like Walgreens and those in UK are doing exactly the same.  Retailers, especially Walmart, are known for religiously tracking revenue per square feet (it is actually per cubic feet) of retail space. All the retails space and shelf space may be sunk cost, but there is an opportunity cost associated with every SKU they decide to stock. Retailers are finding that customers value fewer options more than proliferation and the reduced inventory helps with profits when sales are down. So why are we seeing increase not decrease in SKUs from brands?

When P&G’s customers were trading down to private labels, P&G responded by vertical extension of its product lines like Tide Basic and Tide Ultra. As a multi price point   strategy to keep customers within the brand family that is the right approach. But I am not convinced with their horizontal line extension.

When a brand is already $1 billion in annual revenue (P&G has at least dozen of them) is product proliferation the only way to find growth? Given the  pressure from channels and the data showing otherwise why is P&G flooding the market with a product that differs only in the scent but otherwise has no functional utility to the customer?

P&G is arguably the best in class data driven and customer driven marketer, not just in CPG space but across the entire brand space. May be Google edges them out but that is another story. What are they seeing that the academic researchers and retailers are not?

Procter and Gamble Chasing Market Share

All last year, the common theme among the CPG companies was higher profit despite decreasing sales because they had better price realization. CPGs delivered higher profits by increasing prices, reducing promotions and with creative packaging. But that trend is coming to an end for at least one of the companies – P&G. In the recent investor conference call they announced plan to cut prices, add promotions – all in efforts to regain market share. P&G was losing sales for the past two quarters and they are now determined to turn this around, especially in the  fabric care sector. As  some of its customers turned to cheaper store brands, P&G tried to hold on to them with multi-version pricing. They not only introduced Tide Basic to appeal to price sensitive customers but also introduced high margin super-premium Tide Total Care to keep the customers within the brand family.

The tide has turned now, as they so no cheer in continuing drop in market share, especially in fabric care segment. P&G announced a 13% price cut on its Cheer brand detergent. Is that a move that will  help with market share? Probably. But in the key and the only relevant metric of profit they may be giving away too much with a 13% price cut.

P&G’s 10-K states their average gross margin is 50%. With a 13% price cut their margins will drop and the sales have to increase 36% to make up for the lost margin. That is an extremely tall order in the highly competitive and saturated fabric care market. As a comparison, their historical sales growth was in the region of 3% to 8% per year.

Unless they are looking at the total customer margin and not just gross margin on one product. Customer margin is the total margin from many different P&G brands a customer buys. This will reduce the required increase in sales but not near the 8% number (you can do the math on required customer margin for that). There is one more risk with lowering prices, lowering customer reference price and thereby reducing chances of future price increases.

The net is P&G, the inventor of marketing research and customer driven product strategy, is going to trade profits for market share. I  will be watching next quarter sales numbers with great interest.

It’s Not What It Costs You It’s What Your Customers Value

Whether you are a small business or a large corporation marketing means Segmentation and Targeting. Marketing is about finding what is relevant to each segment and delivering at a price they are willing to pay. There is nothing more to it. It is however easier said than done. It does come  easy to companies like P&G that have done it for so long, institutionalized the process, has the resources to conduct customer research, gather insights and invest on new product lines to monetize those insights.

Not all can afford such unfettered access to intellectual or capital resources.

I saw a post by an artist, Ms. Michelle Moyer, of White Dog Studios, who makes and sells jewelery. Michelle is thinking about pricing her wares correctly. She says,

I think that artists undervalue their work far too often. When I go to shows or browse online and see handcrafted pieces selling for a price that I know will barely cover material costs, if at all, I cringe because this sets the market lower for my work. I believe that my work has value and that incorporates not just the material costs, but the time it takes for me to develop the design and make the piece.

I want to highlight a great point that Ms.Moyer intuitively figured out, it is the effect of reference price. Customers do not know the absolute value of the crafts. There is not a universal system that tells us how much we value Ms. Moyer’s craft’s vs. others. We look at prices relative to available options. While there is no common value for crafts, presence of lower priced competitive items sets a lower reference price for her customers.

Ms. Moyer  talks about rest of her pricing in terms of material costs and labor costs, and about how much artists value their work. Pricing is about capturing a share of the value you create for your customers. Your costs are irrelevant to your customers. Pricing needs to be based on value added to customers. It is not about what you value or what you think the value is, it is what your different customers think.

The value is not the same across all customers. In the book Game Changer, retired CEO of P&G Mr.A.G.Lafley talks about “who is your WHO?. The “WHO” refers to the customer. Mr.Lafley, goes on to say

“As you work to better understand the WHO, you’ll discover that people use your product for different reasons. They may have different occasions for when and how to use it; differences about what they think is a good value, and what they are willing to pay. One size does not fit all”

Ms. Moyer  is practicing a type of multi-version pricing,

I try to offer a range of pieces at various prices. For example, this bracelet, for sale on my Etsy shop, is only $20, which I believe is a fair and affordable price. This bracelet, on the other hand, took much longer to design and create, so it is priced at $70.

This is good but her  multi-version pricing is once again based on her costs rather than on segmentation or customer value. Taking a lesson from Game Changer, there are opportunities to find  the reasons people buy the bracelets, different occasions and how the customers use the bracelets.

It is not easy when you are a small business  who cannot afford to hire someone to do strategic marketing or invest in doing customer research or segmentation studies. Even a simple pricing of just one version of your product gets harder  when you make products that have no “common value”.  So the easiest route seem to be producing what is easy to you or pricing it based on your costs.

But it does not have to be as rigorous and formal as it is for a multi-billion dollar giant like P&G.  You can solve 50% of the problem by simply  starting a conversation with your customers.

This blog  and I can help you get started on the right type of customer conversation and finding what they value.  Write to me.

Related article: Small Business pricing.

Procter and Gamble on Multi Version Pricing

Last quarter many CPG companies including P&G reported increase in profit despite declining or stagnant sales mainly because of the increase in product prices. Sales were slow because of the economy, cost sensitive customers shifted to cheaper and private label options. Profits increased faster than sales growth because CPG brands were able to charge a higher price to brand conscious customers.

Are higher prices alone enough? While higher prices delivered higher profit over last period continuing price increase is not a viable strategy. There are challenges from stores and other competitors. Stores stepped up their battle on price increases and stole customers by increasing private label offerings.  Brands cannot continue to ignore sales growth. Take a look at P&G’s revenue and profit numbers and growth over past four years.

pg_profit

Their profit growth has been positive but the rate of growth has decreased since 2006. Mr. Lafley, the outgoing CEO of P&G, has this to say

“You have to see reality as it is.  In every recession there are hosts of compensating consumer behaviors as they manage a more modest budget. We have to expand our portfolios to serve the needs of those consumers. I think a lot of that is going to last.”

To this end every business unit a  P&G is working on reaching wider customer base with a broad price range of products. They are developing both super-premium products that can be sold at higher price premium than current products and value products that  appeal to cost conscious customers.

Nestle, another CPG, has already outlined multi price point products as its strategy. Multi version pricing is exactly the solution for increasing revenue and profits. It is about  increasing product lines and keep the customers within your brand family. When the economy turns around it is easier to up-sell to your own customers than acquiring customers you lost to the competition.

But the challenge is every new product line comes with big costs. Even though R&D and productions can be piggybacked on previous lines, the biggest cost item comes from marketing and sales. There are also the risks of cannibalization, new brands steering sales and resources away from current brands and whether or not customers will turn to the premium brands when times turn around. Implementing a multi version strategy without spreading the resources too thin is what sets great companies apart from the rest.

Safeway Moving Up The Value Chain

In February, CEO of Safeway Mr.Steve Burd expressed his dissatisfaction with the CPG brands over their price increases. Almost all major CPG companies increased their prices since last fall when the commodities and fuel prices shot up. Since then their costs have come down but prices stayed up.

As I wrote before, the price increases enabled companies like Cadburys, Nestle, Unilever, Del Monte  and others to deliver 10-14% increase in their quarterly income despite  very small growth and in some cases even fall in their revenues. The brands were able to grow their profits because of the change in customer mix. As more and more of their price sensitive consumers switch to cheaper and private labels all they are left with are the price insensitive and brand conscious loyal customers.

Safeway is a distribution channel with high fixed costs and low single digit operating margin (around 3%). It saw its gross margins fall over the past five years. It was not happy with price increases because for two main reasons, it further cuts into its gross margin as Safeway and relies on these brands to draw in customers to the stores that help drive its revenues. The single metric of retail is monthly same store sales growth. Any stagnation or fall in this number sends bad signal to the stock market.

Safeway then said that it “will chew up the brands” if they did not reduce prices. I questioned this claim then but I admit  Safeway has followed through with its claim by aggressively developing its private label brands.  CPG companies had not had much to worry about a single retailer pushing its private label as the labels are, until now, limited to just that retailer. Now Safeway is moving up the value chain by becoming a CPG company. As a clear competition to major CPG brands, Safeway has signed deals to distribute its O organics brand and Eating Right brand at other regional retailers and at Albertsons.

The additional channels are not much compared to the rest of the market but Safeway has clearly established that it has a clear strategy and can execute on the strategy. The next round of price negotiations between Safeway and CPG brands is going to be much different from the previous rounds.