Market segmentation and pricing strategies in the detergent industry

Selling Detergents a. Executive Summary

The product selected for study is the mundane detergent. Study of detergent markets give the person a complete idea into the market development and growth as this has been one of the first products to reach a developed stage and new ideas have to be used for growth of brands. The market shares of brands keep changing, though the comparative market shares of different companies manufacturing detergents remain relatively stable, as some undeclared pricing agreements exist between manufacturers. The reason for agreements is the very high expenditures on marketing and advertising by major manufacturing companies to protect their own market shares and also to stop new entrants into the market. The situation of the total market is also difficult right now, and for that any new entrant has to take a number of factors into consideration. Thus the entire marketing strategy has to be decided on extraneous considerations.

b. Individual Pricing Component

The product to be studied is washing detergents. The product is used in every household or even by individuals living separately, for cleaning of clothes. Since every individual's clothes get dirty, they have to be cleaned till the clothes remain usable. The demand is thus stable. The product is used in every section of the society; there are many price ranges in which the product is available, with different qualities and possible utilization in different manners. The usage of detergents for this purpose has come after the manufacture and use of soaps for the same purpose was stopped due to the technical advantages of detergents and the price advantages for manufacture. There are a large number of brands targeted at different groups: some buy for the prestige of using a brand; some housewives buy a brand for free offer of associated products; some buy it for suitability to the method they have for washing clothes in terms of machines, flow of water, etc.

The product is available in powders, bars or cakes, liquids, concentrates, etc. The consumer demand is at different price levels according to the facility the household has for washing clothes, the money that can be afforded by the household for the purpose and the image that they want to project to others in the social group. The product is generally available in all types of stores, though select brands may not be available in all places. The usage of a particular brand is decided by the household, and there is no reason to assume any brand loyalties. The likelihood of using a brand gets increased with the associated images that the brand is promoted with, and the association may be through pictures in the advertisements along with the product. The consumer demand for the product in the total market is growing at a slow rate, and the growth is only due to change of population habits. The brand shares keep changing and the change depends on the offer that is more attractive to the housewife, who is generally both the customer and deciding authority for purchase.

c. Cost Component

The methods of manufacturing detergents are well established, and not all marketing organizations manufacture the detergents they sell - it is possible to get some other organizations to manufacture the detergent that is being sold by a marketing organization. The only development has been through the use of enzymes which help in the reduction of wash temperatures and removal of phosphates from detergents as required presently by global environment concerns. Through the removal of phosphates and reduction of temperatures would have led to reduction in cleaning ability which is avoided by using enzymes. The lowering of wash temperatures also reduces the requirement of energy for a load of wash, as the reduction in temperatures is from about 90 degrees Centigrade to about 40 to 60 degrees Centigrade. For the environment a lower load of phosphates into rivers and lakes also reduces the decline that these systems are facing. For fabrics the wash conditions are gentler and that stops the colors from rapidly fading out. Different types of materials can also be introduced in the fabric as the wash temperatures have been reduced. (Enzymes: A Primer on Use and Benefits Today and Tomorrow)

Regarding the question of costs, it was seen during a study in England that the competition between Proctor & Gamble and Unilever was very high in England. The competition between the two was mainly on advertising, and this was leading to very high advertising expenditures for them. This resulted in very high prices, and these prices also stopped new manufacturers or marketing organizations from selling their products in Great Britain as they would also face similar costs when they tried to enter the market. The costs are related to promotional schemes that provide gifts and provide an incentive for brand purchase. Customers also liked gifts and prizes, and while the marketing organization incurred costs, the items also provided value to customers. It was seen that many brands were similar in composition, but the brands appealed to different sections of the market in terms of geographic area, social levels, or even personal preference. (Conclusions and Recommendations) This was the justification for maintaining them, though this process increased costs.

e. Economic Forecast Component

Forecasting of sales for any product is difficult, and it is more difficult when the product is not ready. Some consider forecasting to be a science and other consider it to be an art, but it is probably a bit of both combined with a lot of good luck thrown in for good measure. Most managers believe that they are good at making forecasts, but the forecasts that they turn up with are usually wrong, and even when the forecasts are met by the actual figures, the meeting is often by chance than design. One of the greatest examples of this is in the brand launch sales forecasts, and most of these are wrong, and probably 80% of the forecasts that are made when the brand is launched are wrong. That is the reason most brands which are launched, turn out to be failures soon after the launch. The realization comes after a couple of months of the launch. The brand names are registered before the launch and that is why we keep seeing different products coming out with the same name, as most companies cannot keep producing and selling when the turnover is below a cost efficient figure.

Regarding the entire exercise of forecasting, there are two major types of forecasting and they are broadly classified as macro forecasting and micro forecasting. The entire exercise is however only a theoretical exercise to get to the expected sales levels for the product for which the sales levels are being sought. Macro forecasting is the estimation of the total market for the product. This means that it requires determining the level of demand in the market of the product during a fixed period within a short time for which the estimation is being sought. Though various names are given, it is impossible to provide any long-term estimations for the movement of the market demand for any product as various factors come into play, and all these factors are not known - the biggest unknown being product development as is now happening to the it market. Micro forecasting is with regard to the prediction of the sales for an individual unit. This is related with the market share of the sales organization and predictions of what the market share is going to be in the future. (Sales forecasting)

Even in this there is the influence of matters which are outside the control of planning and forecast. Let us take the case of Liverpool City. They were the UEFA Champions league winners in 2004-2005 and this has helped the whole city recover from its position earlier. The city had a poor reputation earlier due to the Heysel disaster when 39 Italian and Belgian fans died after the rioting fans from Liverpool caused a wall to collapse. This was during the 1985 European Cup final. This resulted in a very poor reputation for the city, and now the city has had world wide coverage due to the AC Milan v Liverpool final. This was followed up with extensive celebrations in the city, and the international image is now positive. The airport has also been named after John Lennon and this has been expanded. As a result, it is one of the fastest growing airports. The views on television have been of 300,000 persons crowding the areas of the city during the festivities. (Success in the City: How the UK's City-Regions may be Re-Born) the turn of events could not have been forecast by any person, and as a result of the events, Liverpool has become a city with a future for Britain, though it had seemed unlikely a few years back.

Getting back to the task of forecasting, since the product is well-known and has existed and been used for a number of years, forecasting can be simply done. It can be safely assumed that the trends which have been seen for the product in the last few years will also continue. We are talking about macro forecasts here. There are many methods to develop forecasts and which method has to be used depends on the degree of accuracy required, the availability of data and information, the time horizon that the sale forecast is expected to cover and the position of the product in its life cycle. (Sales forecasting) When there is a lot of money attached to the decisions that will be taken based on the forecast, then it is natural that a lot of money can be spent on preparing the forecast. This is expected to be more accurate while being more expensive. The second point about forecasting is the availability of data, and in some cases data is easily available like clothing, retail, food retailing, holidays, etc. In other cases the concerned data is more difficult to get. The next important point is the period that the forecast will cover, and the longer the duration it is, the more expensive will be the forecast. When the product is at the beginning of its life cycle then data of sales and information may not be available in a large quantity, but when it reaches a maturity stage, then the forecast can be based on a time series. Thus several considerations have to be made.

For the purpose of this write up, we are talking about a brand that has to be launched. Whether it will be launched at a national level or regional level depends mainly on the finances that are made available for the venture. In any case, certain historical data have to be gathered and some of them have to be used for the purpose of the forecast. The data can be gathered for unemployment rates, inflation rates, employment growth, housing starts, retail sales, interest rates, total consumption of material, investment in business and foreign currency rates against hard currencies. (Economics for Managerial Decision Making) These are all very good theory, but when the product is near maturity, then all that is not relevant any longer, and what we are mainly talking about is the target audience, as there are many brands and each brand is targeted to a different audience. The new brand that we are talking about will be targeted to a specific audience, and the consumption only in that segment is relevant. The pricing of different segments of the market is also different, and the segment we are talking about is not a segment of the rich users. The important part of the projection is then the volume of sales at that level, and what share is planned to be taken at that level. The product is of a nature that individuals will use in spite of all changes in economic indices. The growth in the total market is now not more than 2% a year, and so that growth is not relevant to a new brand.

What is being attempted here is an action of cost leadership and the purpose is clearly to gain an advantage in costs over competition. The market that we are trying to tap is a mass market and the segment that we are talking about buys mainly due to price. To compete in that segment the requirement is a competitive cost strategy. To achieve this one has to make sure that the costs are low for raw materials and energy, efficient production technologies and advantages of location. (Chemicals Regulation and the Porter Hypothesis: A Critical Review of the New European Chemicals Regulation) Other important requirements for leadership in costs are economies of scale in production and that can be achieved only through large market shares, learning of the economic methods of production and the greatest utilization of the available capacity. The biggest advantages in terms of costs arise from cheaper material resource inputs and the technological process for producing the material. Since the benefits come from leadership in minimizing costs, the greatest focus of the organization is on improving production technologies and minimizing costs of production.

Some times, this may lead to a situation where technology may seem to be going in the reverse direction. An example may be given about the south Asian country, India where Levers were the leaders in terms of volume for detergents, and they lost their leadership position to small scale manufacturers of detergents. This was due to two main reasons. The small scale manufacturers were getting a benefit from the government in terms of taxes, and they were using soda ash in place of Sodium Tri-Poly-Phosphate. The first change was a matter that Levers could do nothing about, but the second change led to a loss of color by the fabric during washing. Well at the same time, polythene had entered clothes and they were lasting for a long time, and they lasted at least till the period that users of detergents got bored with the clothes they had been wearing. After a period, they would not have worn the clothes anyway, so it did not matter to them whether the color was right or not. Thus, so far as detergents are concerned there are many factors other than sales quantities that lead to brands existing, increasing or collapsing. (Chemicals Regulation and the Porter Hypothesis: A Critical Review of the New European Chemicals Regulation)

The strategy that we are talking about is one of differentiation with existing products, and this requires developing new areas of existing markets for many existing products. For this purpose, the qualities of existing products have to be changed. Some of the existing characteristics may have to be combined in a new product, or sometimes, new products may have to be developed from existing products. Here the sense of new products is not a totally new product, but a product with characteristics that will appeal to a particular segment of the market. (Chemicals Regulation and the Porter Hypothesis: A Critical Review of the New European Chemicals Regulation) in this case, a classic case may be remembered "We are number 2 and so we need to try harder." The line talks about the efforts to provide satisfaction by an organization which has to provide satisfaction to customers to be able to survive.

These products may also be viewed as monopoly products as they have succeeded in developing characteristics which appeal to certain segments. This monopoly is not permanent, but will disappear when the competitors understand the methods through which the change has been achieved. Yet as long as it has the monopoly, the product can gain advantages from its monopoly position. Every differentiation involves costs but if the differentiation is done in a manner that appeal to customers, then customers will more than adequately compensate the manufacturer for meeting his dreams. At the same time, when any differentiation is done, it means that any there will be additional costs for manufacturing through required changes in capital equipment. This makes organizations intending to follow hesitate, as they are not certain whether the change in product will succeed. This may be remembered in the case of Volkswagen, which remained the only small car for a long time, as other manufacturers were not certain that the market will follow the product benefits of Volkswagen. These are qualities that exist in small and medium sized enterprises and they can get differentiation advantages for mass products. However, product life cycles are quite advanced for items like detergents and it is difficult to achieve cost advantages for such items.

Now let us look at some of the indicators that have been talked about. For our purpose we shall select unemployment rates, inflation rates, employment growth, and interest rates. In this case the unemployment rate and employment growth are opposite sides of the same coin. If one increases, the other has to decline. There have been no specific pattern in inflation rate and it has fluctuated between growth and decline. Please look at the table given on the next page. From 2000 January, it increased till March, then dropped, and rose again till June. Then it dropped again till the end of the year. It dropped almost steadily through 2001, and the decline continued till June 2002. Then was another period of rise which continued till March 2003 and then again there was another decline till February 2004. Then there was a short period of rise till June 2004 followed by another rise and another fall. Can any one predict anything from this? If there is a steady trend, it might have an effect, but these ups and downs, with the variation lying within a range of 3 percentage points, cannot affect a product like detergents. The only difference may be in selection of brands as has been stated earlier. Regarding interest rates, the rate has been fixed by the decisions of the federal authorities. This is causing havoc in some sections of the economy, especially with regard to the investment in housing, but cannot affect detergent sale or purchase, as it is viewed to be essential by most parties. (Inflation Rate in Percent for Jan 2000-Present)

Does this mean that economic forecasts have no relevance? Certainly not - there are products that consumer's feel that they will buy when they have to move up to a grade that they would like to. What I mean are products that are associated with the image of users. It is important to understand what these are. These may be thought as prestige cars like Mercedes. It is not that the car runs any differently, but it has an image and any person driving a Mercedes is felt to be an individual well placed in society, with a lot of money, and being able to do what he likes to do. Some persons use the product to bolster their egos, and others to bolster their image, so that can get what they want to get. In short the difference is not in the product, but the image that it conveys. For these products, it is very important to talk about economic indicators, as their customers also know about them. They start working in only certain economic situations, and those economic situations can be judged through economic indices. (Inflation Rate in Percent for Jan 2000-Present)

Thus one would say that economic forecasts are useful depending on the product. A lot of action is taken by individuals to convince decision makers that they have done a lot of work. One great example that can be remembered is in advertising presentations for selling the campaign of a client. This goes on for hours with a lot of information being given to the client about his own product and related matters. There is fabulous food that is given to the clients with the hope that they will buy the campaign. But do they? In most cases, the 'Big Boss' asks for changes and everybody else bows to him. May be this is a cynical view of the entire exercise, but there is nothing certain in marketing. Regarding pricing strategy for any new product, there is nothing fixed, only it has to be around the same level as the products it is trying to get market share from. It may be higher or lower, but that depends on the cost of production. Anyway no new brand makes profit for a couple of years, and if it lasts till then, it may as well be a part of the stable of the marketing organization.

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Ave 2005 2.97% 3.01% 3.15% 3.51% 2.80% 2004 1.93% 1.69% 1.74% 2.29% 3.05% 3.27% 2.99% 2.65% 2.54% 3.19% 3.52% 3.26% 2.68% 2003 2.60% 2.98% 3.02% 2.22% 2.06% 2.11% 2.11% 2.16% 2.32% 2.04% 1.77% 1.88% 2.27% 2002 1.14% 1.14% 1.48% 1.64% 1.18% 1.07% 1.46% 1.80% 1.51% 2.03% 2.20% 2.38% 1.59% 2001 3.73% 3.53% 2.92% 3.27% 3.62% 3.25% 2.72% 2.72% 2.65% 2.13% 1.90% 1.55% 2.83% 2000 2.74% 3.22% 3.76% 3.07% 3.19% 3.73% 3.66% 3.41% 3.45% 3.45% 3.45% 3.39% 3.38% (Inflation Rate in Percent for Jan 2000-Present)