This weekend, the FT Magazine ran an interesting article by economist, Tim Harford. In it, he argued that brand proliferation leads to higher prices. He uses the example of the breakfast cereal market to illustrate how a huge number of brands, each purporting to offer something different and special, fragments the market and leads us to believe that this vista of choice justifies the higher prices that are charged. It is certainly the case that we would expect Weetabix Gold to cost more than ordinary Weetabix. Tim Harford reckoned that it didn’t taste any better (in his opinion it was worse) but it doesn’t stop people paying a premium in the belief that they are getting something better and different.
What is the lesson for us in business to business marketing? Well, Mr Harford is spot on. The more brands we produce, the more marketers have a justification for charging a figure that is closer to what people are prepared to pay. “Price fighters� account for only around a third of most markets, the market in numeric terms and yet, they are such a vocal and logical group we find ourselves reducing prices across the piece, just to appease them. In other words, we reduce our prices to two thirds of our customers who are not price fighters and may be prepared to pay more for our products and services if only we could figure out what to offer them.
So, read on and think what this could mean to you. But be careful.
Getting price increases isn’t just a matter of launching lots of brands.
Genuine brands need support. In a large market like breakfast cereals, the heavy promotional spend is justified. In a narrow industrial niche, the small size may not countenance a large advertising spend to bolster each brand. These are interesting thoughts, nevertheless.
Paul Hague
CEREAL KILLERS OF COMPETITION
By TIM HARFORD, Financial Times (FT Magazine) 11th-12th November 2006
Pricing and product diversity gives producers a healthy shelf life but keeps costs high for us. Nothing beats a stroll around the supermarket to inspire an undercover economist. My latest visit revealed a cornucopia of breakfast cereal. You should go and take a look sometime. There’s Weetabix itself, of course, and nobody these days would be surprised to discover Weetabix Organic. You may also be aware of Weetabix Minis, all of which take the “crisp� format:
Honey & Nut Crisp, Chocolate Crisp, Fruit & Nut Crisp.
The story doesn’t end there. There’s Oatibix. It is alleged to be “Oatily Different�, although it looks and tastes remarkably like Weetabix. There is also, most magnificent of all, resplendent in an embossed packet, Weetabix Gold. The basic value proposition of Weetabix Gold seems to be that it’s like Weetabix, but better. I couldn’t taste much of a difference, although Weetabix Gold has slightly less sugar, so tastes very slightly worse. This mesmerising list of products is just the starting point: the Weetabix company offers many other brands of cereal, most supermarkets offer an own-brand rival to Weetabix at a fraction of the price and a small number of other producers pack the shelves with products from Shreddies to Frosties. The only outlier is the king of cereals, Grape-Nuts.
So what is going on? Two things. The first is price-targeting. Weetabix and Weetabix Gold are similar products, but Weetabix Gold is a lot more expensive and, allegedly, tastes better. The Weetabix Food Company presumably hopes to skim some extra cash out of people who hardly notice the difference in price without discouraging regular, price-sensitive customers.
Most price-targeting strategies include a deliberately low-quality product at a low price. In the high-tech industry, this is often a professional piece of kit with the good bits disabled, but in the supermarket, it is simply the “value� range, packaged to look like an air-drop from the World Food Programme. You might think that spoiling the look or performance of a product is a bad way to make money, but it’s simply a way of keeping the rich or careless customers buying the premium products.
Something else is at work in the cereal aisle. The differences between the innumerable varieties of bran flakes, corn flakes, puffed rice and muesli are vanishingly small and seem to get smaller by the day. This proliferation presents customers with a trade-off. Unless you are feeble-minded, more varieties of cereal are better because you can get closer to your ideal cereal. Some people, presumably, appreciate the existence of organic variants or high-bran cereal with a slightly different type of raisin.
Yet there is a cost to all this. The more varieties of cereal there are, the more expensive each one is likely to get, because of higher production, marketing and distribution costs. It is not obvious whether the price — whatever it is — is worth paying. But economists have studied the breakfast cereal market. Richard Schmalensee, who analysed the US breakfast cereal market when it was under anti-trust investigation in the late 1970s, found that the proliferation of brands was simply a way of avoiding good honest price competition. Each new brand staked out new ground and discouraged competitors from entering.
Economist Aviv Nevo reached similar conclusions more recently. He believes that although a few large companies supply most of the cereal market, there is no conspiracy at work. There does not need to be: the practices of price-targeting and product proliferation are enough to keep margins high and competitors at bay. That is something to ponder over your morning toast.
For more information on pricing, click here.
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on Tuesday, November 7th, 2006 at 10:34 am and is filed under Pricing Strategy, Segmentation.
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