Consumers Force Change in Prices, Products
In recent months, pricing pressures have hammered a broad variety of businesses, forcing many reluctant managers to approve price reductions and increased rebates.
Although price cuts and rebates are not new, the causes for them are. The traditional strategy of using price reductions to gain market share is not driving this round of cuts. Instead, a new set of economic realities is starting to squeeze Americans’ pocketbooks and reduce their appetite for credit. Dollars once designated for the supermarket, dining out and travel now pay for auto insurance, health care and property taxes. Consequently, the old “image conscious” consumer has been replaced by a new highly “price sensitive” customer.
This growing consumer shift is forcing manufacturers and retailers to sharpen their pencils and find out how much lower prices must go to move products. Companies’ pricing strategies must now meet the new economic realities of their customers, not just the market share moves of their competitors. As a result, companies that can open new distribution channels, reposition existing products, or find new markets with high-quality, low-cost alternatives will find receptive buyers in this new environment.
Some alert companies have already begun to implement this new strategy. The 60-acre Orange County Market Place, a new version of the old flea market, draws more than 4.5 million customers a year--more than either nearby Universal Studios or Knott’s Berry Farm. Rather than the traditional flea market of recycled, attic inventory, this one features over 1,000 merchants who sell primarily new merchandise at below-discount prices. Innovative companies such as MCI and U.S. Sprint use booths to sign up new long-distance customers. House of Imports, one of the biggest Mercedes-Benz dealers in the country, sells more new cars at its marketplace booth than through its local newspaper advertising. By creating an environment where buyers feel that they can negotiate with sellers, this “modern flea market” has developed a strong appeal for “bargain-hungry” customers.
Other bargain-hunting consumers have forced changes in many product categories. For example, lower prices have reached the beer, cigarette and automobile categories, forcing important shifts in market share.
Beginning last September, Adolph Coors Co. launched a low-priced beer for the first time in its 116-year history. A short time later, Anheuser-Busch announced that it would begin cutting prices in selected markets on all its brands, including market leader Budweiser. Initially, Anheuser-Busch argued that its price drop was a response to its competitors’ pricing actions. However, the brewing giant eventually admitted that sales of its flagship brand had declined.
In early 1989, the Liggett Group launched a low-cost cigarette called Pyramid. This budget brand, backed by almost no advertising, became one of the most successful cigarette introductions of the decade. Brown & Williamson repositioned Viceroy from a premium-priced image brand to a low-priced generic brand, doubling its market share from 0.6% to 1.3%. That change produced a $250-million increase in sales.
Last month, Chrysler announced an unprecedented pricing move on its best-selling cars and mini-vans. Not only did the company offer the first rebate on its Plymouth and Dodge mini-vans and its Chrysler Town & Country models, it also offered a guarantee that if the rebate program became more generous between Feb. 1 and Sept. 30, Chrysler would make up the difference.
Chrysler Chairman Bennett E. Bidwell said the program was not a response to competition but “fundamentally we want to get some traffic” for Chrysler dealers. Sluggish buyer traffic, down 30% to 40% from the previous year, forced the company to speed up its rebate schedule. When in need, Bidwell admitted, “you go with your best, and that’s what we’re trying to do.”
By all indications, the pressure on spendable income will continue this year and perhaps beyond. Those companies that ignore their customers’ plight may find themselves in a sales struggle. For those alert companies that can find innovative ways to provide high-quality products at a low cost, the new selective consumer still offers opportunities for a substantial increase in sales.
