Philip Morris is a high profile company with a long list of successes and broad variety of brands to its name. These brands ranges are in cigarettes, beer and grocery products categories. Among all the brands by Philip Morris, Marlboro is the most successful in strength and profitability. It is also the leading cigarette brand in the United States of America.
Prior to the announcement by Philip Morris Company of the promotion and pricing strategy, Marlboro had been characterized by steepest reduction in sales and so there was a dire need to take up the necessary steps to revive Marlboros lost market share.
To analyze whether the Philip Morris pricing and promotion strategy was a good idea we have to analyze the conditions that prevailed at that time. This will help us to determine whether there was a need for the strategy.
The cigarette market in US had been characterized by reduction in consumption of the premium brands that started in 1986 stretching all the way even in 1992. Cigarette shipments had also decreased steadily since 1988 as shown in exhibit 1(Harvard 1997). These facts imply that, though there was a slight increase in the consumption of cigarettes as indicated by exhibit 4 (Harvard 1997), the overall profitability of companies like Philip Morris which depended heavily on premium brand cigarettes as their main product was greatly affected.
The market was also characterized by increasing demand for discount brands of cigarettes meaning consumers were shifting from the premium brands to the discount brands. As Philip Morris depended on Marlboro, a premium brand, the strategy to improve its consumption was a necessary.
The pricing and promotion strategy rolled out by Philip Morris on April 2, 1993, was aimed at increasing the consumption of Marlboro cigarettes and to reduce the gap between premium cigarettes prices and discount cigarettes prices. All this was aimed at recapturing back the market of Philip Morris Premium brands and thus maintain profitability in the long run.
The strategy was in three parts. The first part was Marlboro price promotion. This was designed to reduce the retail price by 20%. The list price was not changed by other measures like the use of coupon were utilized to effect the retail price reduction. The company urged retailers to display signs of the price reduction and to distribute catalogs containing the promotion details. The retailers sales were then monitored weekly.
This step was aimed at increasing the demand for the Marlboro cigarette. As studies had implied decrease in the price of the cigarette led to increase in the demand. Thus this step was important to help Marlboro recapture its market share. In 19192, the market share of Marlboro had declined considerably form 25.8% in 1992 to 24.4% in 1992 (Harvard 1997). This called for adjustments if Philip Morris was to remain the leader in the cigarette production.
The decision to effect the retail price reduction without changing the list price helps to retain the brand reputation. Marlboro being a premium brand is associated with image, value and quality and so as reducing its listed prices drastically could denote reduction in its quality the use of the other methods to effect the price reduction was a good idea. The companys decision to monitor the retailers helped to make sure that the price reduction was transferred to the consumers as intended. Retailers were also used to create publicity of the promotion program hence helping to create awareness and consequently effectiveness of the program.
The second part was Marlboro continuity program. In this program expenditure was increased on a program whereby purchases of Marlboro earned points while maintaining the earlier expenditure on other forms of advertising. These points enabled them to take part in an expedition or to acquire prizes like Jackets and Radios. This program was aimed at increasing awareness and sales of Marlboro.
This program increases sales in that as customers long to get many points they buy more hence increasing sales. It also creates publicity of the brand. As indicated by exhibit 4(Harvard 1997) the overall demand of cigarettes was increasing though very slowly. Thus if Marlboro came up with a way of attracting this market, it can increase its market share as the market slowly expands. This strategy could also help recapture the market share that had gone to other brands as the program encouraged consumption of Marlboro.
The third part was discount brands Strategy. In this step Philip Morris reduced the brands from three tiers to two tiers, meaning there were only two groups of brands. This was done by increasing the prices of the least priced brands. Advertising was also started for some of the discount brands.
This action could help Philip Morris to trap more gains from the market of the discount brands as consumers showed more need of the discounted brands. Exhibit 9 (Harvard 1997) shows that the market share of the discounted brands was rising steadily with a market share of 30% in 1992 as compared to 25% in 1991 and less than 20% in 1990. The benefits derived from this market sector could help maintain profitability and give Philip Morris more funds necessary to initiate measures to recapture the market share of Marlboro. Generally, it is evident that the strategy adopted by Philip Morris was aimed at closing up the gap between the prices of the premium and the discount brands.
There was a big price difference between the premium brands and the discount brands reaching $0.97 in January 1993. Trends showed that people now preferred the discount brands as compared to the premium brands. This is indicated by exhibit 9 (Harvard 1997) which showed an increase in the market share of discount brands and Exhibit 11 (Harvard 1997) which shows a reduction in the market share of Marlboro, a premium brand. Thus, as people preferred the lowly priced discount brands, reducing the price of Marlboro could increase the consumption of this premium brand.
As indicated by the market conditions, there was a need for Philip Morris Company to roll out the pricing and promotion strategy in order to save Marlboro. The strategy represents an effective way of addressing the decline in consumption of Marlboro, and thus saving Philip Morris Company from reduction in profitability in the long run. The action represents a perfect example of brand repositioning, which though it will cost the company, works to the benefit of the company in the long run.
Harvard Business School. Philip Morris: Marlboro Friday (A) Harvard, Harvard Business School (1997)