P&G and Target Pricing
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.