Phillip Morris cut the price of Marlboro cigarettes by 20%, causing its stock to drop 23% as investors saw it as an admission of defeat. However, the price cut was successful, allowing Marlboro to gain market share by being more competitively priced against generic brands. Strong brands can command price premiums if within consumers' acceptable price bands. Marlboro's prior price hikes made it vulnerable, so the cut brought it back in line with consumers' value perceptions. Value-based pricing balancing product, cost, and price is key to sustainable competitive advantage.
Phillip Morris cut the price of Marlboro cigarettes by 20%, causing its stock to drop 23% as investors saw it as an admission of defeat. However, the price cut was successful, allowing Marlboro to gain market share by being more competitively priced against generic brands. Strong brands can command price premiums if within consumers' acceptable price bands. Marlboro's prior price hikes made it vulnerable, so the cut brought it back in line with consumers' value perceptions. Value-based pricing balancing product, cost, and price is key to sustainable competitive advantage.
Phillip Morris cut the price of Marlboro cigarettes by 20%, causing its stock to drop 23% as investors saw it as an admission of defeat. However, the price cut was successful, allowing Marlboro to gain market share by being more competitively priced against generic brands. Strong brands can command price premiums if within consumers' acceptable price bands. Marlboro's prior price hikes made it vulnerable, so the cut brought it back in line with consumers' value perceptions. Value-based pricing balancing product, cost, and price is key to sustainable competitive advantage.
Phillip Morris cut the price of Marlboro cigarettes by 20%, causing its stock to drop 23% as investors saw it as an admission of defeat. However, the price cut was successful, allowing Marlboro to gain market share by being more competitively priced against generic brands. Strong brands can command price premiums if within consumers' acceptable price bands. Marlboro's prior price hikes made it vulnerable, so the cut brought it back in line with consumers' value perceptions. Value-based pricing balancing product, cost, and price is key to sustainable competitive advantage.
Phillip Morris on April 2,1993 announced that it was cutting the price of Marlboro Cigarettes by 20% (~40-50 cents a pack)
Phillip Morris stock price fell from $64.12 to $49.37
a 23% drop that represented a one day loss of ~$13 Billion dollars
Why did the Stock Price Fall?
Investors interpreted the price slash as an admission of defeat from the Marlboro brand, that Philip Morris could no longer justify its higher price tag and now had to compete with generic brands.
The share value of other branded consumer product
companies, including Coca-Cola and RJR Nabisco, fell as well. The broad index fell 1.98% that day.
Why did Phillip Morris Drop the Prices?
Economy was still Sluggish Private labels had increased the quality and received attention from customers and retailers Hefty price increases in the recent times(~2-3 times a year)
Stagnant growth with reducing market share in some
geographical areas
Marlboro- Company History
Worlds best-selling cigarette brand. Flagship Brand of Phillip Morris-Worlds largest manufacturer of cigarettes Forbes 26th and CNNs 7th most valuable brand in the world
It is also the worlds most profitable non-durable
consumer good
Marlboro Brand History 1920s-1954
Earlier positioned as a premium cigarette
The tip of the cigarette was colored pink to protect
womens white teeth from yellowing
It was also positioned as a milder version of
cigarette that well dressed man smoked after dinner
Advertising slogan was Mild as May
Marlboro Brand History 1954-99
Philip Morris tried to change this image and target more financially attractive group young males.
Leo Burnett, an advertising agency was responsible for
repositioning, came out with the idea of presenting Marlboro brand through archetypal masculine characters.
The cowboy character was the first in the lineup and
the only one was hugely successful
Marlboro Man-Success Story
It transformed a feminine campaign, with the slogan "Mild as May", into one that was masculine, in a matter of months.
There were many Marlboro Men. The first models
were a Navy Lieutenant and Andy Armstrong.
Marlboro Man-Success Story
Within just a year Marlboro from niche brand with 1% market share went to top 4 position in the U.S. market
It was successful because of the
1.Use of archetypes 2.Visual semiotics 3.The Savanna Principle.
Marlboro Country-Advertising Extension
In 1964, the company revived the cowboy but this time he was in mythical Marlboro Country.
This vivid image paid off in 1971 when cigarette ads were banned from TV.
The striking print shot of cowboys enjoying a smoke on
horseback continued to fuel sales growth. In 1972, Marlboro became the No. 1 tobacco brand in the world.
Marlboro Friday- Context
Phillip Morris had steadily increased the prices of cigarettes(2-3 times a year)
Price of a pack of Marlboros more than tripled between
1980 and 1992. There was a $.8-$1 difference between premium brands and discount brands which increased sales of the discount brands Marlboros Market share dropped to 22% and it would have further dropped to 18% if Phillip Morris did not do anything.
Marlboro Friday- Consequences
By cutting the price, Marlboro was able to narrow difference to $.4
It was able to woo back customers who had switched to
other brands of cigarettes Within 9 months, Marlboros market share increased to 27% Years later, Marlboro currently holds 42% of the Market share and commands a price of $5.70 compared to competitors $4.20
Concepts From Textbook- Price Bands
Consumers rank brands according to the price tiers in a category
Within any price tier, there is a range of acceptable prices
called price bands. In some cases consumers infer the quality of a product on the basis of its price They use the perceived quality and price to arrive at an assessment of perceived value
Concepts From Textbook Value-based pricing strategies
Perceived value is often a factor in purchase decisions
Thus marketers have adopted value-based pricing strategiesattempting to sell the right product at the right price.
Hence price has multiple meanings and can play multiple
roles to consumers
Understanding Consumer Price Perceptions
Only a few consumers can recall specific prices of products accurately When observing a price, consumers compare it with internal frames of reference(prices they remember) and external frames of reference(regular retail price) Most research has found that unpleasant surprises(like stated price higher than perceived value) have a high impact on purchase likelihood.
Lesson 1 from Marlboro Friday
Strong Brands can command a price premium This price premium should be within the acceptable range of the consumers By cutting the price of the Cigarettes Marlboro brought the price of the pack within the acceptable range of the price band Consequently sales of the brand started to increase
Lesson 2 from Marlboro Friday
Price hikes without increase in the value can lead to vulnerability
Evident from the fact that Marlboro faced competition
from lower priced private label cigarettes
In such cases the consumer is willing to trade down
as the brand does not justify the price it commands
Keys for success for Value-based pricing strategy
For effective value-pricing strategy a balance must be struck between
1.Product Design and Delivery
2.Product cost 3.Product Prices Proper Design and delivery can enhance value. Consumers are willing to pay premiums when they perceive added value in products and service
Keys for success for Value-based pricing strategy
The second key to success is to lower costs as much as possible. Ask the question Is the consumer willing to pay for that?
The final key is to understand how much value
consumers perceive in the brand and to what extent are they willing to pay a premium over product costs
Summary Marlboro reduced the price of its cigarettes by 20% which led to stock price falling by ~26% People perceived it to be the death of brand. In reality the move was very successful with the brand quickly gaining market share Brands must price their product in the consumers price reference band
Value based pricing strategy should be adopted for
sustainable competitive advantage.
DISCLAIMER
The current presentation is created as part of the individual
assignment in the Brand Management course under Prof.Sameer Mathur in IIM Lucknow
Customer Service Care Success for Life -V2: Exceptional client services, support & behavior by becoming customer centric & obsessed to improve retention, engagement, experience & lifetime value
Customer Service Care Success for Life -V2: Exceptional client services, support & behavior by becoming customer centric & obsessed to improve retention, engagement, experience & lifetime value
