"Should we advertise low prices? How should we advertise pricing?"

Q: We read your series of Friday columns on pricing and thought that you may also be able to help us. We face a different kind of problem about pricing.

We're a small ad agency. Almost all our clients are SMEs with just one big "anchor" account. Our small clients are competing on their low pricing. They want us to develop an ad campaign focusing on their low price. We tried discouraging them in doing this. We told them the campaign will damage their brand equity if not now then eventually. But they are insisting. They said they've done this in the past and not that bad came out of it. They also told us that they've seen it done successfully by other small advertisers before. They've threatened that if we won't do it or if we won't put our hearts into the job, then they have no choice but to change agency.

Who's right about this issue? What do we do? We don't want to lose clients. At the same time, we want to let them know when they're mistaken, or when we believe they are. Please help.

A: Thank you for bringing this challenging pricing issue to our attention. Here's our diagnosis and prescription.

At the outset, we wish to say that both you and your small clients are right. You are correct under certain competitive conditions and pricing objectives. But your small clients are just as correct under other competitive conditions and pricing objectives.

This means that the two contrasting ad campaigns can co-exist even side by side and nothing that adverse can happen. This is true as long as each campaign is clear about what each price ad campaign wants to happen to its target audience after seeing, hearing and/or reading the price ad.

The Jetstar Case

Consider first low price advertising. Just a few years back, we saw Jetstar Asia, Qantas' budget airline, advertised its extremely cheap Manila-to-Singapore flights. The print ad said:

"Fly Jetstar Asia to Singapore for only US$79. Daily flights from Ninoy Aquino International Airport. Book online www.JetstarAsia.com."

So what happened to Jetstar Asia?

It actually has prospered and today boasts of "more 90% monthly on-time performance." Its current advertising copy also says this:

"If you think all low-cost airlines are the same, think again. At Jetstar Asia, we believe in bringing you the same safety and comfort standard as legacy airline, but without you having to pay legacy airline fares."

Which means what? That means at least two things. First, with its claim of more than 90% on-time performance, it must have passed the stage of penetrating its targeted low-cost flyer segment. Second, it's now preparing to draw passengers from the regular fare paying flyer segment some of whose passengers are looking for a much cheaper airline fare but with "the same safety and comfort standards" of the regular fare airline.

How come this low-cost pricing ad succeeded and did not harm the brand image of Jetstar's mother airline, Qantas?

The answer is in Jetstar's very transparent intent to go after the budget passenger segment. It's all about segmentation. And all it did was to gave this segment's flyers exactly what they were after: half the fare of the legacy airline but with same on-time performance.

Will it succeed in drawing passengers from the regular fare paying segments? If it is able to deliver on the next promise of half the fare but with the same safety and comfort standards of the regular fare airline, it will succeed. Of course it will get all of the regular fare paying passengers. But it will attract those who are price sensitive.

Because of this budget airlines' success, at least two things will happen in the competitive market. First is to make passengers more aware of options for flying cheap but just as on-time, as safely, and as comfortably as in the legacy airlines. Second is to raise the paying passengers' price sensitivity when choosing which airline to take every time they fly.

Have other low-price ads experienced the same or similar success?

RETAIL Store examples

You'll find a whole lot of examples in retail stores. We were once in Robinson's Galleria when we saw a rubber shoe boutique's display window showing its shoe merchandise beside a colorful poster that said: "For the same thing (obviously referring to just a check mark but without mentioning the brand), why pay double?" And that's not for announcing a sale.

Towards the end of the third quarter and into the fourth, leading car brands announce the coming of next year's models. Right beside this announcement is just as large a poster asking both pedestrians and motorists to come in and see the remaining inventory of this year's models available at substantially discounted "LOW, LOW PRICES!" The brand images of Toyota, Honda, Mitsubishi, Nissan, Isuzu, Kia, and others are no worse off for all these in the next year and many years after.

So, what does the foregoing say about when you should support the low-price advertising intention of your small clients? That's when the following three considerations obtain. Firstly, your small client must have already succeeded in participating in the low-price segment. Secondly, its competitive market must be getting more and more undifferentiated, and it's unlikely that the trend will be reversed soon. And thirdly, it makes strategic marketing sense to raise your consumers' price sensitivity in the market.

What about your case? The case of advertising high prices, premium pricing? What does this ad look like? How come it rarely draws the kind of criticism that low price ad gets?

Even a few examples will quickly answer these questions. An old Bayer ad on its aspirin said: "All aspirin is not alike." The Q-Tips ad for its cotton swab said something similar: "A swab by any other name is not the same." In the copy of its ad for Black Label Scotch, Johnnie Walker made the same point but using an engaging prose:

"When you are dealing with something quite extraordinary, price somehow seems irrelevant or even irreverent. Indeed, for those who appreciate fine Scotch, Johnnie Walker Black is priceless."

Even an extreme case seem to also work. If you consider the wine list of a restaurant as an in-store ad material, just look at this wine menu at a Greenbelt 2 restaurant:

2002 Crane Lake Merlot : P1,200
2000 Chateau Mouton Rothschild: P84,380 (marketed as the 'wine of the century')
1997 Harlan Estate Cabernet: P138,094
1996 Screaming Eagle Cabernet: P195,705

When we inquired if any of these items ever get any buyer, the proud head waiter quipped in a faked British accent: "Of course sir. In fact, quite often." Yes, of course. This is Greenbelt 2, the hangout of Makati's "rich and very rich" consumer segment. We forgot our basic marketing and did not think segments.

It should now be easy to understand why there's much less negatives with premium price advertising. There's something to be proud of and the intent is precisely that. It's to enhance the product image of the premium priced brand.

When premium price advertising succeeds, its effects contrast with those we saw in low-price advertising. Because of the enhanced brand image, the premium price advertiser gains so many points versus its competitors. The larger this gain becomes, the more price insensitive the consumers in the category becomes. There's reduced price sensitivity for the advertiser brand.

So there's your case for premium price advertising. It will work when the competitive market is highly differentiated, and when you wish to further reduce price sensitivity to your advertised brand.

Keep your questions coming. Send them to us at MarketingRx@pldtDSL.net.

The price is right?

This paper (Philippine Daily Inquirer) really has the best readers in the world! Thanks for all your comments and questions. We can't reply immediately to all of your questions and requests individually, especially those of you who sent them by text, but we will try to cover some of them here in this column. So, before we get into the featured topic, let's fire off some quick answers to your questions to our column last week (painless price increases) and publish some of your comments. We included questions that we got from the original column in 2006 and in last week's redux.

Is pricing a social responsibility of marketers?

Q – "Is it right to increase price during crisis? My customers are price sensitive." – May B.

A – Well, if you're willing to absorb the increase of your cost in doing business and remain profitable, then by all means, don't increase your prices, especially during "crisis." (But remember, in the Philippines, we are always in "crisis." ) This social responsibility issue perennially faces the likes of Petron, Caltex and Shell. And of course, Meralco. Marketers who supply parents with school supplies and books, I think, have some social responsibility as well when it comes to pricing. You did not mention what product you sell, but our consumer coping studies show that people who are faced with price increases either (a) bear the increase and continue buying the brand you market, (b) replace or substitute the brand, or (c) stop buying the brand or product all together.

The informal survey we did last week reflects the consumer coping mechanisms, mentioned above, to crisis or price increases. One reader (in 2006) said, "I have stopped buying Inquirer one day a week because of the recent increase to P18." The same reader also mentioned that if this paper increased its price again by another two pesos, he would stop buying altogether and substitute the Inquirer by going online and reading the web version, Inquirer.net.

Another reader responding to this year's poll in last week's column, said, "Hi, I'm Sidd, a 4th yr cvl engg stud in UPDil. I jst read ur artcle 2day in PDI. Dis is a rply 2 ur pol question. Hnestly, I stoppd buying newspapers (only on b-days, xmas & d Oscars). I borrow from d engg library on my vacant hurs. Price increases r really a pin (mahal n ulit ang pandesal!). I guess pipol don't get askd @ wat price dey cud 2ler8 bcoz service provders know dat fter ranting bout hi prices pipol wud stl be wiling 2 pay 4 watever price der is. Sigh"

In Cebu, our last coping study (2006) shows that when it comes to deodorant, over 30% of the DE consumers resort to letter "c"—they stop buying to cope with the hard times. So would it be "right" to increase the prices of your deodorant in times of crisis? This country would have to face another kind of smelly crisis if that were to happen. Tell us about it.

Would it be right for Coca-cola to increase their prices during crisis when the poor use their product as a substitute "ulam" or viand? (Our coping study shows that the poor mix Coke, or toyo, or pork lard on their rice—that is a meal for them. On good days, they will have Lucky Me! cooked and mixed with cheap vegetables and an egg—to feed a family of five.) If Coca-cola did increase their prices, would it be right for the five-star hotels to increase the selling price of Coke in their lobbies, which already starts at P100 to P150? Tell us about it.

Marketers can charge premium prices as part of their positioning and market segmentation strategy and not feel bad about it because part of their profits goes to a "cause." (Check out the Body Shop's positioning. It basically says to us, "We sell relatively expensive, all natural products sourced from third world countries at a good profit but at least we give back some of that profit to the third world country where it was made.") Call it Robin Hood marketing. Profiting from the rich, to give back and help the poor.

One big price increase works for this reader

"Your column, 'How to do painless price increases' is right dead-on. It works to affect one big price increase rather than a series of small ones. Amazingly, our patrons tend to stay loyal with our products that way. Keep up the valuable information. More power!"

– Mr. Fred

We don't know what product Mr Fred markets, but since he expressed "amazement" at their customer's loyalty despite their one big price increase, most likely Mr Fred stumbled into this particular "law" of pricing. Again, to find out at what price your customers will continue to buy your products, ask them at what price they will stop buying your products. (For those who just said, "huh?" after reading this, please read last week's column by going to www.marketingrx.org)

Competing with low priced competition when you're a premium brand

"We are maintaining a high price for our brand because of quality and brand equity. We are also trying to maintain sales growth. Our problem is that cheaper competitors are coming in and our trade customers are asking us to reduce price. Should we reduce price? How should we solve this problem?" - Mr. Worried Marketer

Don't worry. (As Bro. Eddie would say, "sabi ng bible it's a sin to worry!") Anyway, start by checking which of the low priced competitors are gaining sales. If these are competitors who have minimum acceptable quality in their products, then you can conclude even without research that they are drawing consumers whose priority product values are "low price first." (As long as there's minimum quality in the cheap products that are attracting them.)

Then check how much lost sales these low priced competitors with a minimum amount of product quality are causing your brand. These lost sales will level off after some time. What you're left with are the consumers whose priority product values are the opposite of those who went over to the low priced competitor products. Their priority places high quality as the first consideration in the brand they buy and price is just secondary. These consumers define your premium market segment where your brand leads and has its equity. A premium market segment is nice to own. This is because it derives its market size not from its population size but from its higher usage frequency, its larger amount bought or used, and the higher price that it pays. These multipliers can make a low population size-premium segment count as a multiple of a large population size-low priced segment. (See the senior MRx's book, Strategic Market Segmentation.)

"I would buy PDI up to P26. Im loyal to PDI and esp ur mktg rx column. Keep it up guys! - mark

Reducing price may back-fire on you

Now, if you reduce price, analyze how this will affect your premium consumers. It's highly likely that you will alienate most if not all of them. That means further lost sales. Why can this happen? It's because they won't believe that you can maintain high quality with such a price reduction to match the pricing of the cheap competitor products.

Your lower price won't also bring back your lapsed consumers to your brand. Most will be resentful and say: "So, after all you can significantly lower price. Why did you do that only now? You took advantage of us all this time and for so long. You #*@!%+?&"

By trying to get your premium brand to the price consumers via a lower price while holding on to your premium consumers based on your brand equity, you'll find that you're likely to lose both. If you want a piece of the action in the price consumer segment, come in with your own low-priced brand or variant with as good or slightly better minimum quality versus the available low priced competitors. This is what Tang did when it launched Kool Aid. (See MarketingRx August 1, 2003 – "Who's afraid of brand cannibals?" If you don't have access to that, don't worry. Soon, the Inquirer Books will co-publish the Best of MarketingRx for Brand Executives. What's available now at bookstores is the Best of MarketingRx for Entrepreneurs.) To hold on to your premium consumer segment, you're better off reinforcing your premium brand's perceived strength: that it is first and foremost high quality available at a value-for-money price and therefore specifically tailored to their priority values for a premium brand.

This is essentially a market segmentation strategy. If you're faced with an evolving market that has partitioned into two segments, one a premium segment and a low priced segment, you can't satisfy both by your premium brand alone. If you lower your premium brand's price, you damage your brand equity in the eyes of your premium consumers and you lose your hold on them. If you enter the low-priced segment with your lower priced premium brand, you won't be credible to consumers in this segment because they'll resent your lowering your price only now when you could have done it way before.

The second part of this market segmentation strategy says that to succeed in two market segments with two differing priority product values, you should have either two brands or two distinct variants of one brand each specifically suited to satisfy the priority values of each of the two segments. This means that you should keep your premium brand in the premium segment. If you want to meet low priced competitors, then do so by your own low priced brand or variant.

The wisdom of introducing into the low priced segment your own low priced brand or variant is in being able to catch the price consumers who are leaving your premium brand. Many if not most of them will stay with your company via your low priced brand or variant. This way then, you won't be giving them away to the low priced competitors because you did not have a low priced brand or variant of your own to attract them and satisfy their own priority values.

What the Inquirer did was to participate in the premium brand (with this paper and its sister publications from Hinge like Golf Digest) and low price segment (Inquirer Libre! and its tabloid, Bandera) expectedly, those who answered that they would keep on buying this paper until P26 were those who texted from Globe cel numbers. Those who answered that they would stop buying at P22 came from Sun and Smart numbers.)

So it is a strategic market segmentation error to lower the price of your premium brand in order to answer the threat of a growing number of low priced competitors. The next time your trade customers asked you to lower the price of your premium brand, tell them that you're coming out with your own low price brand or variant. You'll see the excitement in their eyes when you announce this. The trade people are the first to know that this is the strategically correct market segmentation move to take.

The last word on pricing goes to this loyal Inquirer reader who texted her response to our informal survey on this paper's price increase:

"Gud am! I'll never stop buying PDI. E2 na dyaryo ko since dalaga pa. Now I'm a homemaker w/ 3 kids and my hubby wants to switch which I hate. I forego merienda just to have my PDI. Thanks." – Mrs. Manalo

For comments or questions, email us at marketingrx@gmail.com while our pldtdsl email is on the blink! You can also text us at 0920-9519618.