Setting and changing prices are key strategic marketing decisions. Setting the right price for a product or service can be the key to success or failure. In this activity we see how the competition for the diaper market among Kimberly-Clark, P&G, and the smaller companies illustrates the increasing importance of price as a competitive tool and how price competition changes the structure of a market.
Whether the orientation is toward control over end prices or net prices, company policy relates to the net price received. Cost and market considerations are important; a company cannot sell goods below cost of production and remain in business, and it cannot sell goods at a price unacceptable in the marketplace. Firms unfamiliar with overseas marketing and firms producing industrial goods orient their pricing solely on a cost basis. Firms that employ pricing as part of the strategic mix, however, are aware of such alternatives as market segmentation from country to country or market to market, competitive pricing in the marketplace, and other market-oriented pricing factors, including cultural differences in perceptions of pricing. Some approaches to international pricing include full-cost pricing, variable-cost pricing, skimming, and penetration pricing.
Read the case below and answer the questions that follow.
The battle between Procter & Gamble and Kimberly-Clark has brought Pampers and Huggies, respectively, to places they have never been, forcing down diaper prices worldwide, and expanding the global market for disposable diapers. A battle in Brazil between the two giants gives an interesting glimpse of the global markets of tomorrow. Disposable diapers are still considered a luxury by the vast majority of Brazil’s 194 million people, whose average annual income is under $8,000. Before P&G and Kimberly arrived, rich and poor alike generally made do with cloth or nothing at all. The disposables that were available were expensive, bulky, and leaky.
When less than 5 percent of the Brazilian mass market used disposable diapers, P&G launched Pampers Uni, a no-frills, unisex diaper. Before Uni, it cost more to pay for disposable diapers than to pay for a maid to wash the cloth ones. The introduction of the relatively cheap, high-quality Uni fundamentally changed the economics of the diaper market for most middle-class Brazilians.
The plan was to put such nonessentials as disposable diapers within the reach of millions of Brazilians for the first time. At the same time, the Brazilian economy was on the upswingâ€”inflation had subsided, and overnight, the purchasing power of the poor increased by 20 percent. Low-priced products flew off the shelves. P&G had to truck in diapers from Argentina as it struggled to open new production lines.
But the good days did not last. Kimberly-Clark entered the market and began importing Huggies from Argentina. With the help of a Unilever unit as its Brazilian distributor, Kimberly-Clark gained immediate distribution across the country and quickly made deep inroads into the market. Unilever agreed to work with Kimberly-Clark because its archrival in soap was P&G, and Kimberly-Clark’s archrival in diapers was P&G. The two companies previously had entered into a global alliance to look for winâ€“win situations when it was in both their best interests to partner and help each other, from a competitive standpoint, against the dominant P&G. The Brazilian market was the perfect case for cooperation.
With Unilever’s help, Kimberly-Clark “push girls” invaded markets to demonstrate the diaper’s absorption. Sales rose rapidly and began to exceed production. To increase market share, Kimberly-Clark formed an alliance with Kenko do Brazil, P&G’s largest home-grown rival, and created the “Monica” brand. “Monica’s Gang,” a comic strip similar to “Peanuts” in the United States, sells widely in Brazil. SÃ£o Paulo malls were crowded with thousands of kids waiting to get an Easter photo taken with actors in Monica suits, an honor that required the purchase of three packs of diapers. Monica diapers were a big hit, and Kimberly-Clark became number one in the Brazilian market.
It was a tough blow to P&G. The company had devoted an entire page of its annual report to how Pampers Uni had tripled its market share in Brazil, helping P&G “retain the number one position in a market that has grown fivefold.” Now it suddenly found itself on the defensive. First it cut prices, a step P&G loathes. “Price cutting is like violence: No one wins,” said the head of its Brazilian operation. Then it broadened its product range, rolling out an up-market diaper called Super-Seca, priced 25 percent higher than Pampers Uni. Later, in a flanking move, it also unveiled Confort-Seca, a bikini-style diaper originally developed for Thailand and priced 10 to 15 percent lower than the already-inexpensive Uni.
Kimberly-Clark fired back, matching the price cut and then introducing a cheaper version of Monica called Tippy Basic. Four weeks later, P&G cut prices another 10 percent on Super-Seca and Confort-Seca. Despite the price cuts, the two brands were still relatively expensive; then a wave of really cheap diapers arrived. Carrefour, a French retailer that is now Brazil’s biggest supermarket chain, sells crudely made Bye-Bye Pipi diapers from Mexico. Despite their inferior quality, the cheap imports pulled down diaper prices across the board.
The real war started when lower prices became so attractive that consumers who otherwise could not afford diapers came into the market. As prices continued to drop, the market grew; that attracted more producers, which were mostly small, local Brazilian companies that offered even lower-priced competitive diapers. One such company, Mili, saw its market share increase from 4.8 percent to 16.2 percent over a three-year period. What accounts for growth of these smaller companies? One analyst suggests that the multinationals are too sophisticated and, thus, too expensive for the Brazilian market: “Smaller companies are just supplying what consumers need at a price they can afford.” But it also can be said that as prices drop, products become more attractive to a larger segment of the total market.
Sources: Raju Narisetti and Jonathan Friedland, “Disposable Income: Diaper Wars of P&G and Kimberly-Clark Now Heat Up in Brazil,” The Wall Street Journal, June 4, 1997, p. A1; “Brazil: Procter & Gamble Increased Market Share,” SABI (South American Business Information), May 31, 2000; Jonathan Birchall, “New Tactics in the Battle for Babies’ Bottoms,” Financial Times, http://www.FT.com, August 24, 2006. For more information, see Kimberly-Clark’s Web site at http://www.kimberly-clark.com, and Procter & Gamble’s at http://www.pg.com; also see Matthew Bird and Rosabeth Moss Kanter, “Procter & Gamble Brazil (A): 2 Â½ Turnarounds,” Harvard Business School Cases, January 1, 2008, for details about the firms’ decision-making approaches.
1. Which of the following was true of the Brazilian market for disposable diapers prior to the entry of Procter & Gamble and Kimberly?
A- Disposable diapers were an essential item for a majority of the households in Brazil.
B- Disposable diapers sold in the market were of reasonably good quality.
C- People from low income groups could afford to buy diapers.
D- Disposable diapers that were available in the market were expensive.
E- There were plenty of good brands to choose from.
2. Procter & Gamble, with the launch of Pampers Uni, changed the economics of the diaper market for Brazilians by
A- launching a luxury product, targeting mainly upper middle class Brazilians.
B- establishing an alliance with Kimberly-Clark to market its new line of diapers.
C- making diapers a nonessential product for consumers in the Brazilian market.
D- launching expensive diapers as the purchasing power of the people increased.
E- introducing relatively cheap, high-quality diapers for the Brazilian market.
3. â€œWith Unileverâ€™s help, Kimberly-Clark â€œpush girlsâ€ invaded Brazilian markets. To increase market share, Kimberly-Clark formed an alliance with Kenko do Brazil, and created the â€œMonicaâ€ brand. Monica diapers were a big hit, and Kimberly-Clark became number one in the Brazilian market. This was a tough blow to P&G.â€ Which of the following actions did P&G take as a result of this stiff competition from other brands?
A- It introduced a cheaper version of the Monica brand called Tippy Basic.
B- It formed an alliance with Kenko do Brazil, the largest diaper brand in Brazil.
C- It introduced Pampers Uni, a first of its kind, no-frills, unisex diaper.
D- It launched an inexpensive diaper called Super-Seca.
E- It cut down prices of its diapers and broadened its product range.
4. The continued price war between Procter & Gamble and Kimberly-Clark in the Brazilian market for disposable diapers, and the eventual entry of new firms, is likely to have led to which of the following outcomes?
A- New firms entering this market primarily targeted upper class Brazilians with premium products.
B- The overall prices of disposable diapers increased.
C- The market for disposable diapers in Brazil shrank in size.
D- New consumers, who found disposable diapers too expensive earlier, were now able to enter the market.
E- The level of competition in this market was substantially reduced.
5. The battle between Procter & Gamble and Kimberly-Clark in the Brazilian market for diapers led to the growth of local Brazilian diaper companies. Which of the following was true of the products offered by these new firms?
A- They were expensive, bulky, and leaky.
B- There was very limited demand for the diapers offered by these new firms.
C- Their introduction caused a phenomenal rise in diaper prices in Brazil.
D- They were low priced competitive diapers.
E- They were of a much higher quality than the diapers offered by Procter & Gamble.