Disclaimer: This post is based on a simple observation and a basic idea. There's a high probability that this disclaimer will actually be longer than the following post. And yeah, my heartfelt thanks to Allout.
A fundamental method of pricing is known as captive pricing. Simply put, captive pricing is a method wherein the companion product is priced low and supplies are priced high. For example, Mach 3 sells its razor (plus 1 blade) at Rs. 99/- to the first time buyer while a single blade alone costs Rs.82/-. Essentially, the initial low (potentially loss making) price of the razor stimulates future sales of blades (which provide a high margin).
Yesterday, the ever increasing threat from mosquitoes forced me to borrow an Allout mosquito repellent from a friend. Allout is a typical example of captive pricing - for a first time buyer, the machine is given practically for free. The idea is to make profits by future sales of refills. However, this was a unique case (or at least a first for me). What I believed to be an Allout-kit turned out to be an Allout machine with a Mortein refill. If I were allout, I would dig a hole and bury myself in it and if I were mortein, I'll simply stop producing machines and reduce the selling price of my refills.
No prizes for guessing the lesson from this story then: Captive price your product only if you can be the only beneficiary from future supplies to the product. In the story above, Allout could've (and should) patent the design and dimensions of its machine to prevent loss of future sales to scavengers. However, in businesses where products are captive priced and service the main revenue generator, this can be a much bigger problem. How do you deal with it? The solution isn't very straight-forward...happy thinking. :)
A fundamental method of pricing is known as captive pricing. Simply put, captive pricing is a method wherein the companion product is priced low and supplies are priced high. For example, Mach 3 sells its razor (plus 1 blade) at Rs. 99/- to the first time buyer while a single blade alone costs Rs.82/-. Essentially, the initial low (potentially loss making) price of the razor stimulates future sales of blades (which provide a high margin).
Yesterday, the ever increasing threat from mosquitoes forced me to borrow an Allout mosquito repellent from a friend. Allout is a typical example of captive pricing - for a first time buyer, the machine is given practically for free. The idea is to make profits by future sales of refills. However, this was a unique case (or at least a first for me). What I believed to be an Allout-kit turned out to be an Allout machine with a Mortein refill. If I were allout, I would dig a hole and bury myself in it and if I were mortein, I'll simply stop producing machines and reduce the selling price of my refills.
No prizes for guessing the lesson from this story then: Captive price your product only if you can be the only beneficiary from future supplies to the product. In the story above, Allout could've (and should) patent the design and dimensions of its machine to prevent loss of future sales to scavengers. However, in businesses where products are captive priced and service the main revenue generator, this can be a much bigger problem. How do you deal with it? The solution isn't very straight-forward...happy thinking. :)
Disclaimer:The views presented are completely my own, with a tinge of practical experience, which might have been limited!!So go ahead n take it wid a pinch of salt :)
ReplyDeletePost:
naaice!! :) the marketing geek at work i guess!!well a very insightful post i must say :) ..though i have no big solution to offer, but i guess there are players who have somehow found a way across this quagmire. Yes, i am talking of the much successful Goodnight Active, the new range of machines+liquids(i guess these ones are new m nt sure though!) that Goodnight came up with i guess almost a year or two back!
the idea was simple, create differentiation in the features that your product(esp the machine here) provides!!In Goodnight's case thats the Active & Normal mode, and then ensure that no other liquid fits into your machine's make!!
the people buy you liquid's on the virtue of the newer more effective machine!!
But this obviously needs to have some failsafe, since competitors can again come up liquids that fit your machines!!( i again am not very sure if any competitor has done that or if Goodnight has some patent!!)
Are you sure that size and dimensions of the refills can be patented.
ReplyDeleteThe formula I am sure can be patented, not too sure about the refill though.
Same goes for razors too. Not too sure what Mach 3 have patented in their case. Some basic reading up showed that some companies do produce mach 3 compatible blades. The challenge here is to have a complex design and patent that so that coming up with a compatible blade is difficult.
Nice post nevertheless. Could have had long discussions over this :)
@Bibek and Kartik:Yup...Goodnight's done the right thing..but, the idea, as you of course understand, is not limited to mosquito repellents/razors and the solution i proposed might be ludicrous (Thanks Kartik)...what marketers have to do is find out a way to keep out scavengers...how they do it without incurring substantial costs is what they're paid for, isn't it?:)
ReplyDeleteI did notice the case myself and sometimes it comes down to brand loyalty vs an attractive market space. The situation is similar in many products and must say a mighty headache for marketers!
ReplyDeleteI agree with the solution proposed by bibek, though allout has a strong connect and brand recall as a mosquito repellent, the refills seem to be treated as a commodity, hence different dimensions might be a solution, also marketers need to highlight that how using only an allout refill in an allout machine is more effective and only that combination will serve the customer need of effectively repelling mosquitoes(even though it might not be the case). Regarding competition changing size of their refills i am a bit skeptical whether it will operationally possible to respond to a different machine size.
ReplyDelete@kamu : Nice observation dude( btw i guess the combination was used effectively by the services team during the CRP :) )
@Shivani & ankur:Inducing brand loyalty is a possible solution. However, it is extremely difficult to implement in a low involvement product like a mosquito repellent. The case worsens because of the price sensitivity of the Indian consumer. Also, the scavenger can always get better shelf space and more facings through better trade promotion (by utilizing its cost advantage).
ReplyDelete@hitesh: There is mention that the refills are treated as commodity by the indian consumer and hence the price sensitivity you associate is a natural outcome at present. what i suggested was a positioning where you say you get best results when the machine and refill are of the same vendor(in this case allout). This is something like dominos pizza is best with a coke(a very crude example). This kind of co-branding can encourage customers to believe that they will get value for money only for the right combination. This promotion strategy might work for the company
ReplyDelete@Ankur:I agree with the idea in principle but on practicality issues it is a tough bet...:)
ReplyDeleteAlso, try fitting in an allout in a mortein machine...;)
nice blog....helped me get through the last lame class...:)
ReplyDeletemy 2 cents, the newer refills and machines have incorporated this thing ...the mortein refill that R&B gave us does not allow all refills (so some shopwallas told me)
also most of these companies have made it a point to promote the refill (or whatever you'll be regularly purchasing) in their ads. Most printer ads today tell you the benefits of that companies ink , give a disclaimer in the end and even threaten to pull your warrenty if you attempt a refill . Mach3 also promotes its blades, ads talk entirely about the blade...the razor is not even mentioned :)
hmmmm...with some class still to go will google this a bit more....awesome observation ...
Thanks amlan...go on and google some more...:)
ReplyDelete