Marketing: The New Price Warriors

THE PROFITS MODELS

Profits. And price. An inter-play of these 2 `P's makes the Product Pyramid the ideal profits model in the automobiles market. MUL uses it, and Fiat is planning to model its own business on it. The Product Pyramid posits the existence of distinct customer segments, exhibiting varied purchase-behaviour. In effect, customer preferences vary in terms of style, colour, features, and price.

The base of the Pyramid is occupied by low-price, high-volume products--like the Maruti 800--where the margins are slim. The apex of the Pyramid is occupied by high-price, low-volume products--such as the Maruti Esteem VX.

Although profits are concentrated near the top, the base plays a crucial role. It creates an entry-barrier for competitors, and insulates the profitable area near the top from competition.

The Pyramid is a profits model for companies with multiple products aimed at multiple segments. The profits associated with each product follow models of their own. In the specific case of cars, the most common model is the New Product Profits Model. Thus, the profits associated with a car follow the `S' curve of its life-cycle, and decline as the product nears the end of the maturity phase. MUL's decision to drop the prices of all the versions of the Maruti 800 came at this stage. The respite that this price-cut is expected to provide is aimed at extending the maturity phase of the product even as MUL shifts its investments to create the next-generation best-seller.

It is the fundamental divide in any market: not every company wants to (read: can afford to) play the price-card. E.g., instead of cutting the price of the Matiz, Daewoo Motors is planning an enhanced version with product features like power-steering, and product-plus features like better service and customer-care. Adds A.P. Gandhi, 59, President, Hyundai Motors: "We arrived at our pricing strategy after a careful analysis. We do not believe in knee-jerk reactions to rival moves." And when features are the USP, Second P Marketing cannot help reinforce that position.

Actually, few companies are in a position to imitate MUL's strategy of Second P auto-marketing. Between April and November, 1998, the company sold 2.17 lakh cars; its closest competitor, Hindustan Motors (HM), sold 12,502. The sheer economies of scale, when coupled with the advantage of being far down the learning curve, give MUL an edge no company can match. Agrees R.C. Bhargava, 64, the former CEO of MUL: "I don't think any company, apart from MUL, will be able to make profits."

He could be right. MUL's Net Block is Rs 1,028.96 crore (excluding the new plant that went on-stream in February, 1999). With annual sales of between 340,000 and 350,000 vehicles, the capital invested per car is a mere Rs 29,000. For other companies, like Hyundai Motors, the corresponding amount is Rs 4.90 lakh. In terms of relevance too, its rivals will discover that what works for MUL does not necessarily work for them.

That's because Second P Marketing works best for companies with offerings in several segments of the market. Higher volumes--from the combined sales of products across segments--enable them to drive harder bargains with their suppliers; unit marketing and distribution costs decrease; and the higher margins on products positioned near the top compensate for the pared margins on the basic product. Agrees R. Santhanam, 44, Vice-President (Automobiles Division), HM: "Pricing is a potent weapon only for companies that focus on the entry-level segment since affordability is vital there."

Thus, while Daewoo Motors and Hyundai Motors refrained from countering MUL's charge with their own, Ind Auto responded in kind, slashing the Fiat Uno Diesel's price by 17 per cent. Its gameplan: the Fiat Uno would become its version of the Maruti 800--the staple product that guarantees volumes--while the Siena, a mid-size car it plans to launch in the first half of 1999, and the Palio, a Zen-contemporary Ind Auto will unveil in late 1999, will bolster its margins. In fact, the volumes may even accelerate Ind Auto's efforts to increase the local content of its cars since its vendors can afford to invest in technology, equipment, and tooling for high volumes. And that, in turn, could enable the company to further reduce the price of its basic offering.

THE STRATEGIC PRICE PERIMETER. Strategic price marketing is a corporate weapon that must be applied in the context of an entire portfolio of cars. Attempting to sell the lowest-priced car in every segment will not enable a company to survive.

Price is a religion that forces even heathens to convert. To stay out of the price-war, the abstaining car-maker will need not just courage, but also a product-and-promo mix that convinces customers that they will get greater value despite paying a higher price. Complains B.V.R. Subbu, 43, Director (Sales & Marketing), Hyundai Motors: "It has become very difficult to compete in the cars market. It requires sharp differentiation."

So, auto-makers must fight the customer's perception that the car is a commodity using other differentiators. Says Gautam Bhattacharya, 41, Institute for Integrated Learning in Management, Delhi: "Companies operating in the mid-size or the premium segment should reinforce the individualistic positioning of their brands if they do not want to play the price game."

That's just what most manufacturers of mid-size cars are trying to do despite the desperate need to increase their sales. In November, 1998, for instance, General Motors sold a mere 225 Opel Astras; Mahindra Ford, a marginally-better 312 Escorts; Honda-Siel, 723 Citys; and Daewoo, 1,267 Cielos. But that hasn't led them to drop prices, one reason being the fact that, at the upper end, buyers are shopping for brand-associations; not v-f-m.

As a result, despite a Rs 1.29-lakh cut in the price of the Daewoo Cielo in January, 1998, the car sold only 5,624 units between April and November, 1998, compared to 6,867 in the same period of the previous year, before the price-cut. Argues Arindam Bhattacharya, 37, Principal, A.T. Kearney: "Customers in the market for a premium product are unlikely to let their decisions be swayed by savings of a few thousands."

The problem, however, is that establishing non-price value points takes time. Typical sources of value--such as high mean time between failures, great customer service, or a deep service network--can be established in the customer's awareness only over a period of time. Then too, a purchase is a pre-condition--and that is where the price can make an early difference. Moreover, lower prices in one segment create a gap with the next, which a new player can rush into. Ergo, players in the next segment have no choice but to go down the price-scales as well--as MUL had to with the Zen, for instance.

The easier option, therefore, is to fall in line with the price-cuts. Easier, but not wiser. Sure, the lower price will be an attraction to the first-time buyer who is, essentially, stretching his--auto-purchase is still a male preserve--budget to buy personal transportation. The less the stretch, the more is his likelihood of actually buying a car instead of, say, a two-wheeler. So, even a drop of Rs 1,000 in the small cars segment could expand its size.

Go beyond the entry-level--and the price-value equation will kick in immediately. Only if all other things are perceived to be equal between competing brands will price be a decider. Once incomes start rising again, there will emerge increasing numbers of upgraders as well as first-time buyers who will not necessarily start at the lowest price-level. Thus, price will become less important. Applied as a brand-level strategy, price may help the auto-marketers win over only the entry-level customer.

However, only the lowest-priced player will milk this segment. The rest of the low-price aspirants will have to offer additional features as value to convince the budget-buyer to spend more. As a corporate strategy, leading the charge through price may have a better pay-off. A low-priced product will enable new entrants to gain entry into consumers' garages--a toehold, as it were, to showcase their value-adding features which they can, eventually, hardsell to either secure higher prices for the same products, or to sell higher-priced products that ride on the reputation of their earlier models.

The threat, however, is that of a dangerous dilution of image. Given their narrow portfolios, no auto-marketer in this country can expect to occupy different price-positions with different products. Thus, a Second P auto-marketer in the minis' market will find it difficult to succeed with a premium perch in, say, the sedans' segment. But a uniform price-position in every segment may maim its marketing.

THE STRATEGIC PRICE PERIMETER. Price can be a selling proposition for only one segment of customers. But a company that seeks life-long customers, who progressively move up its product-ladder, cannot rely on price alone for success.

There is a cost associated with using Second P auto-marketing. Which will make its presence felt in the auto-makers' balance-sheets, and separate those who can stay in the price-lane from those who will be forced to drop out. After the price-cut, MUL, for instance, stands to lose Rs 219 crore in revenues if it sells 101,603 cars in the last quarter of 1998-99--the same number that it sold in the corresponding quarter of last year. Unless, of course, demand spurts by at least 12 per cent in response to lower prices. Claims MUL's Mal: "We expect lower prices to bring an incremental growth of 25 per cent over the next 12 months."

If he is right, MUL's profits won't suffer in absolute terms despite the lower margins. But that is the best-case scenario. MUL's competitors will be worse off: Daewoo Motors and Hyundai Motors, for instance, do not expect to break even till 2002. Ind Auto has given itself 6 years to generate profits. And TELCO is certain to feel the squeeze on its already-bruised bottomline even though the sales of the Indica have taken off.

And even these deadlines are linked to ambitious volumes. Hyundai Motors, for instance, needs to sell a minimum of 71,000 Santros a year to break even. So, the company and its Korean cousin, Daewoo Motors, are banking on exports. Agrees Bhargava: "Players have to take a position like MUL on either losing money on fixed assets by not producing and letting a huge capacity idle, or producing and losing money on the product by lowering prices in order to sell."

Can MUL do an encore? Theoretically, yes; realistically, no. The dies used in the manufacture of the Maruti 800 have a life of between 1.80 million and 2 million cars. So, MUL can slash prices, but only till it reaches the 2 million mark. With less than 50,000 cars to go, the company is unlikely to reduce prices further. After that, MUL could either launch a new product that occupies the same segment as the Maruti 800, or it could scale down the price--and the features--of the Zen until that jellybean of a car replaces the Maruti 800, and launch other high-end products. In other words, to lower prices on a sustained basis, an auto-maker must have historically low-cost operations and the financial stamina to withstand lower profits. New players who are yet to break even will be massacred.

In fact, that explains why the Second P auto-marketers aren't communicating their price-positioning explicitly. None of the price-warriors has emblazoned its price in its advertising. Why the reticence? Simple: since they may have to raise their prices--as car-makers often do when costs climb--publicly associating themselves with a particular price-level is dangerous. It is impossible to raise prices and still remain a price-competitor in the perception of the customer. Of course, there is also the option of offering discounts, which has the tactical benefit of not making the price-cut permanent. However, that only creates expectations of further discounts, hurting sales--as Daewoo Motors has discovered with the Cielo.

Ultimately, the biggest price that the auto-makers will have to pay for playing the price-game continuously will be the loss of customer loyalty. The world over, automobile brands succeed on the basis of their relationships with fiercely-loyal customer communities, built around sharp brand images and Unique Value Propositions. By choosing to shift the focus to price at the outset, the car-makers may not be able to indulge in such relationship-building. And if discounts are all that drive the market, there will only be hits-and-runs for India's Second P auto-marketers.