The 86 Percent Solution by Vijay Mahajan & Kamini Banga & Robert Gunther

Author:Vijay Mahajan & Kamini Banga & Robert Gunther
Language: eng
Format: epub
Publisher: Pearson Education

Inverted Pricing

The logic of pricing these sachets is turned on its head in developing markets because consumers actually pay less per volume for small packages. In India, Hindustan Lever charges 87 percent more per unit for its 5,000-gram Surf Excel family pack compared to the per-unit price of sachets. Similarly, Procter & Gamble charges an 80 percent premium for its family-size package of Tide compared to the same amount of detergents in sachets.

In contrast, consumers in developed markets pay more at a convenience store to purchase a single serving of soda versus a 2-liter bottle because they want a quick drink. They purchase a small bag of chips rather than family size because they want something that is convenient to eat at lunch without repackaging. Generally these consumers in the developed world pay a premium for the convenience of a readily available small package and are given discounts for buying in volume through family size-packages or 2-liter bottles. The idea is to encourage customers to purchase higher volumes, which are less expensive to produce.

The pricing in developing markets at first appears to be counterintuitive. But there is a different motivation for small packages in developed and developing markets. In developed markets, consumers buy small packages for convenience and are willing to pay a premium for this. In the developing world, consumers buy smaller packages for price because of limited resources or a desire to conserve money and independence. These consumers are not choosing between a large and a small package but whether to buy the product at all. A consumer who may not be able to afford a family-size package can afford a sachet.

How can companies afford to offer smaller packages for a lower price? It obviously costs more to make and sell many small packages than one large one. The answer is that companies focus on economies of volume rather than economies of scale, growing the market for their products. The sachet sales do not cannibalize sales of larger packages. Instead, they attract new customers who might not otherwise buy the product. Therefore, low-priced sachets are not cutting into the business of their larger packages, as they might in a developed country. Developing countries also have cost advantages in manufacturing and sales that can translate to lower prices. For example, the average hourly cost of Chinese factory labor is just 64 cents, compared to about $21.11 in the U.S.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.