P&G and Target Pricing

P&G’s Global Target: Shelves of Tiny Stores – WSJ.com:

Interesting article in the WSJ about how Proctor & Gamble has had to adapt its approach in countries like Mexico, with different types of customers and different retail models:

“In marketing goods to low-income shoppers, P&G tries to keep in mind their budget constraints and even the coins they carry. Because they are often paid a daily wage, Mexican customers generally carry five- and 10-peso coins. ‘If you want to sell to low-income consumers, you have to know what’s in their pockets,’ Mr. Riestra says. ‘It doesn’t make sense to have something cost 11 or 12 pesos.’

Now the article doesn’t mention “Lean,” but it takes us to the Lean notion of Profit = Price – Cost, where the Price is set by the market and your job, as producer, is to get your Costs low enough to be able to hit your Profit targets. Traditional business thinking (which pretty well ignores rules of economics) takes your production cost and what might be called your “entitlement profit” (such as “I need 10% profit on this”) and determines the Price as Cost + Profit.

Toyota has taken the approach of saying “Here is what the market will give us for this car, so we have to engineer our costs accordingly.” They call this Target Costing and Value Engineering. I think that’s the approach P&G is using, even if they get the terminology a bit wrong:

To ensure satisfactory profit margins, P&G uses what it calls ‘reverse engineering.’ Rather than create an item, and then assign a price to it — as in most developed markets — the company first considers what consumers can afford. From there, it adjusts the features and manufacturing processes to meet various pricing targets. To hold down the cost of its Ace Natural detergent, used to hand-wash clothes, P&G reduced the amount of enzymes in the product. The result: a product that costs a peso less than regular Ace and is gentler on skin. P&G says that reverse engineering helps to keep the company’s after-tax margins ‘comparable’ to those in wealthier, developed countries.”

P&G also realizes quality is important, that you can’t “trick consumers” by cheapening the product in a way where the product doesn’t work anymore. That’s good long-term thinking.

Updated: Matthew May also has a good take from this same article

Updated: Evolving Excellence also had a different angle on this same article

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Mark Graban's passion is creating a better, safer, more cost effective healthcare system for patients and better workplaces for all. Mark is a consultant, author, and speaker in the "Lean healthcare" methodology. He is author of the Shingo Award-winning books Lean Hospitals and Healthcare Kaizen, as well as The Executive Guide to Healthcare Kaizen. His most recent project is an eBook titled Practicing Lean that benefits the Louise H. Batz Patient Safety Foundation, where Mark is a board member. Mark is also the VP of Improvement & Innovation Services for the technology company KaiNexus.

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4 Comments on "P&G and Target Pricing"

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  1. Pete Abilla says:

    Mark,

    This is good to see other firms following this pricing worldview. It’s important to point out, though, that Milton Friedman actually argued strongly for this type of pricing in his papers on Price Theory. I’m not sure how Value Engineering came about, but I imagine its roots can be found Friedman.

  2. Anonymous says:

    Mark,

    I am not sure I follow your last remark about P&G realizes the importance of quality. Enzymes are expensive, but are still put in almost all brands of detergents as they improve performance. Of course they have to be pragmatic about it, and the detergent will work – just not as good.

  3. Mark Graban says:

    Good point, anonymous. I should have talked more about Quality, I’m glad you brought it up. I think there’s a fine line between cheapening the product and taking out things the customer doesn’t value.

    P&G says they are taking this into account (“you can’t cheat the customer”), but they also say:

    “To hold down the cost of its Ace Natural detergent, used to hand-wash clothes, P&G reduced the amount of enzymes in the product. The result: a product that costs a peso less than regular Ace and is gentler on skin.”

    “Gentler on skin” sounds like a very positive spin on the product having less cleaning power.

    Ultimately, the customers have choice. Is P&G’s 10 peso detergent better than the competitors or not? Meeting the target price with a lousy product won’t be a good strategy for anyone. I should have emphasized that more for people without WSJ access.

  4. Ramnath Rangaswamy says:

    An emerging marker perspective from India.

    In emerging markets, (i)coinage and (ii) target pricing are concepts that all marketers and businesses must keep in mid if they have to succeed.

    Coinage is relevant to the FMCG [ Fast Moving Consumer Goods] category. Target pricing is relevant across categories.

    Small cash outlay packs- sachets, single use packs- are big volumes in emerging markets. Pricing, of small cash outlay packs, is a key driver of volumes. And coinage is a big factor in determining the pricing.

    For example, in India, sachets or single use packs have to be priced at Re 1.00 [ 2.5cents], Rs 2.00, Rs 3.00 and so on. A pricing of Re 1.50 will cause dissonance among consumers because consumers would end up paying Rs 2.00 for the Re 1.50 pack. This is because coins of Re0.50 are scarce. There have been instances when volumes of a sku dropped or remained flat when price was decreased from Rs 2.00 to Re 1.50!

    In emerging markets target pricing is seen across categories- shampoos, face creams, refrigerators, air-conditioners, cars, trucks, motorcycles.

    TATA MOTORS http://www.tatamotors.com is an expert at target pricing. They are now developing a car for the Indian markets at US$ 2500. They had earlier developed the Indica [ a hatchback, which sells close to 120000 units a year], ACE [ a 1 tonne van] and Novus all very successful vehicles primarily because of their ‘target pricing’ approach.

    HCL, an Indian Computer Company has begun selling a US$200 desktop.

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