In summary, theory tells us that market share elasticities, structural factors, and firm-specific
effects matter, and they do. Theory does not predict the direction of influence of these factors,
and we find that there are several interesting differences in their influence across marketing mix
variables. These differences may be partly due to the fact that the initiating firm’s move is
cooperative on some variables (deals and coupons), and competitive on others (advertising).
There may be other issues at play, however, such as the costs and profitability of various
marketing mix variables. Our research points to the need for further theory development to better
understand how elasticities, structural factors, and firm-specific factors influence competitive
response.
6. Net Impact of a Sustained Change in Advertising and Promotion Policy
6.1 Impact on Market Share
In order to understand the impact of the value pricing strategy on P&G's market share more fully,
we use P&G's elasticities, obtained from the consumer response model, together with the
changes made by P&G and the competition in each of the four marketing mix variables, to
formally trace the overall impact on the three components of P&G's market share -- PEN, SOR,
and USE. Table 9 suggests the following:
• On average, P&G suffered a predicted 16% loss in market share across the 24 categories in
our study.19 The decrease in share is due mainly to a predicted 17% decrease in penetration.
SOR and USE are virtually unchanged. The hoped-for increase in SOR to offset the loss in
penetration did not materialize.
19 The actual loss was 18%, so the model represents share changes pretty well.
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• The loss in penetration is attributable to P&G's severe cuts in coupons and deals, and the
consequent increase in net price.
• The increase in net price hurt SOR and USE. The deal and coupon cuts did not increase SOR
as might have been expected if cutting promotions strengthened customer loyalty.
• The increase in deals by competitors exacerbated P&G's loss in penetration and also had a
negative impact on SOR. This negative impact of competitor deal increases is just as strong
as the negative impact of P&G's own deal cuts.
• The competition’s cuts in couponing and increases in net price helped P&G’s SOR, and
offset the decrements in SOR resulting from P&G’s increase in net price. But, the
competition’s coupon cuts did not help enough, and P&G still lost penetration.
• Neither P&G's own advertising spending increases nor the competition's smaller increases
had much effect, since both self- and cross-advertising elasticities are quite weak.
6.2 Profit Implications
We use our findings, along with some assumptions, to examine the potential profit impact of
Value Pricing. Our goal is not to evaluate P&G’s strategy, but to explore consequences other
than market share that follow from a prolonged increase in advertising and decrease in
promotion. We use a simple margin calculation as in Hoch, Dreze, and Purk (1994):
Profit = Total Revenue - Total Variable Costs - Fixed Costs (7)
= [(Manufacturer Price)(Unit Sales)] - [(Variable Cost per unit)(Unit Sales)] - [Fixed Costs]
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First, the percentage changes in price and market share in Tables 1 and 9 show that total revenue
should remain almost unchanged:20
Total Revenue96 = [(0.818)(Sales90)] [(1.204)(Price90)] = (0.9849)(Total Revenue90) (8)
Second, under the conservative scenario that variable costs per unit do not change, the 18.2%
reduction in total units sold leads to a corresponding reduction in total variable costs:21
Total Variable Costs96 = (0.818)(Variable Cost per Unit)(Sales90) (9)
Thus the gross margins in 1990 and 1996 respectively would be:
Gross Margin90 = (Sales90)(Price90) - (Variable Cost per Unit)(Sales90) (10)
Gross Margin96 = (0.9849)(Sales90)(Price90) - (0.818)(Variable Cost per Unit)(Sales90) (11)
Equation (11) shows that gross margin in 1996 would be higher than in 1990, especially if
variable costs are large.
One question is whether this increase in gross margin would be enough to cover the increased
fixed costs of advertising. We obtained information about P&G's financials from
COMPUSTAT's annual data file. P&G's worldwide sales and advertising were about $24 billion
and $2 billion respectively in 1990, with the US accounting for 62% of sales, i.e., $15 billion.
Further, P&G's cost of goods sold as a percent of revenue was approximately 57% in 1990. Thus,
20 This assumes that total category sales in the market does not change (a reasonable assumption for mature
categories) and the percentage change in retail selling price is equal to the percentage change in P&G's manufacturer
selling price.
21 It is likely, of course, that variable costs per unit did decrease due to operating efficiencies.
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we can estimate variable cost per unit as 0.57 times the 1990 price, and gross margins in 1990
and 1996 can be written as:
Gross Margin90 = (Sales90)(Price90) – (0.57)( Sales90)(Price90) = (0.43)(Sales90)(Price90) (12)
Gross Margin96 = (0.9849)(Sales90)(Price90) - (0.818)(0.57)(Sales90)(Price90)
= (0.519)(Sales90)(Price90) = (1.21)(Gross Margin90) (13)
Thus, P&G's US gross margin can be expected to have increased by about $1.35 billion as a
result of value pricing (0.21 times 0.43 times $15 B). Assuming that the ratio of US to worldwide
advertising is the same as the ratio of sales, US advertising in 1990 would be about $1.24 billion
(0.62 times $2 B), and the increase in fixed costs due to a 21% increase in advertising would be
$0.26 billion (0.21 times $1.24 B). Thus, the increase in gross margin would be more than
enough to cover the increase in fixed advertising costs. According to our calculations, net profit
would increase by $1.09 billion ($1.35 B minus $0.26 B).22 In short, it is quite plausible that
P&G gave up share points in return for profits.
7. Conclusion
We have used Procter & Gamble’s value pricing strategy to study the impact of a major and
sustained change in advertising and promotion policy. We focus on the role of advertising and
promotion in attracting and retaining customers, on the factors that influence competitive
response, and on how these effects combine to determine overall market share impact. Based on
previous theory and empirical work, we develop a framework for assessing this impact that
22 We do not compare these figures with P&G's reported earnings because our data cover only U.S. grocery channel
sales for these 24 categories and also because we do not have information on cost cutting and other activities that
P&G undertook during this period