Like many other companies, Procter & Gamble Co. (P&G) had to constantly alter its pricing strategies as it faced declining and shifting consumer demand for many of its products from 2009 to 2011. Although the recession that began in December 2007 officially ended in June 2009, P&G managers continued to face consumer cutbacks even on basic household staples. Rather than purchase P&G premium-priced brands, such as Tide detergent and Pampers diapers, consumers chose lessexpensive brands, including Gain detergent and Luvs diapers. The P&G chief executive noted at the time that consumers were trying more private-label and retailer brands than they would in more normal economic times.1 Because the company also faced higher commodity prices and global currency swings, P&G officials raised prices in the first quarter of 2009, developed new products, and increased advertising to emphasize why their brands offered more value than the competition. Officials reported that the higher prices hurt sales volume but increased total sales revenues by 7 percent. However, industry analysts wondered if the deceased sales volume would eventually cause the company to lower prices and increase promotions.2 By spring 2010, P&G had reversed course and was engaged in a market-share war by cutting prices, increasing product launches and spending more on advertising. The company’s goal was to win back market share lost during the recession to lower-priced rivals even at the expense of profitability. P&G lowered prices on almost all of its product categories during early 2010.3 This strategy continued into the summer of 2010, although there were concerns at that point that the company had missed industry analyst profit estimates even though it had increased market share. Although the company announced that it intended to raise prices in the first half of 2011, officials debated whether consumers had become accustomed to the lower prices. Industry analysts argued that the company needed to sell more products in the lowerpriced categories.4 The ongoing discounting reduced P&G’s profits, which decreased 12 percent in the second quarter of 2010, because sales revenue rose less than P&G expected. To offset the negative effects of the lower prices, P&G introduced new products including Gillette razors that promised a less irritating shave, Crest toothpaste with a “sensitive shield,” and Downy fabric softener that advertised keeping sheets smelling fresh for a week. The company also began moving into emerging markets such as Brazil, where its research showed that Brazillians took more showers, used more hair conditioner, and brushed their teeth more often than residents of any other country. The company planned to enter the Brazillian market in several new product categories at once, such as Oral B toothpaste and Olay skin cream.5 Given continued lower-than-expected revenue and slow sales in early 2011, P&G announced that it would cut costs but would also try to raise prices on goods to offset the higher costs. P&G announced initiatives to eliminate some manufacturing lines and sell off smaller brands. However, private-label brands continued to post larger sales gains than brand names.6 In April 2011, the company announced a 7 percent increase in prices for its Pampers diapers and a 3 percent increase in the price of wipes. Surveys indicated that customers were less likely to switch to a cheaper baby product than for items such as bleach, bottled water, and liquid soap. The company hoped that parents would be willing to pay higher prices for diapers, even if they cut back elsewhere, in the belief that the higher-priced products were better for their baby’s comfort or development. P&G also raised the price of its Charmin toilet paper and Bounty paper towels. One industry analyst concluded that brands that had the highest market share, were purchased infrequently (such as sunscreen or light bulbs), were necessities, had few competitors, or where it would be difficult to reduce consumption (toilet paper) were most likely to be the products whose prices could be increased. P&G, with its distinctive items, including beauty products, pet food, and toothpaste, was likely to be better able to raise prices than Kimberly-Clark and Clorox that operated in highly competitive product categories with large commodity cost pressures.7 By fall 2011, P&G reported solid sales growth and that it had successfully raised prices even though some of its competitors held back on their price increases. P&G had more ability to raise prices on its premium products because company officials observed that higher-end consumer spending had held up better than that of lower-income shoppers, who were still affected by continuing unemployment. P&G lost some market share in North America and Western Europe because its competitors did not immediately follow its price increases. However, company officials expected that the competitors would soon follow P&G on its higher prices. This case illustrates how a company’s pricing policies depend on how consumers respond to price changes. In the first quarter of 2009, P&G raised prices and then reported declining sales volume but increased sales revenues. In subsequent years, the company lowered prices, which increased sales volume, but did not increase revenue as much as expected so that there was a negative effect on profits. Because the company was concerned about consumer adjustment to lower prices over time, it also adopted other strategies to increase profitability, such as developing new products and entering new markets. Thus, it appears from the above case that consumer responsiveness to a company’s price changes is related to 1. Tastes and preferences for various quality characteristics of a product as compared to the impact of price 2. Consumer income and the amount spent on a product in relation to that income 3. The availability of substitute goods and perceptions about what is an adequate substitute 4. The amount of time needed to adjust to change in prices.
1. What is the effect of the elasticity of a product on the increase in price for that product.
2. To what extent does consumer income, tastes and preferences influence the demand for a product with a price increase.
3. Using your knowledge of elasticity, as a Managerial Economist, explain the central issues and the various ways to tackle the various challenges faced by Procter & Gamble.