2. Management Decision and Implications
Phillip Morris on April 2,1993 announced that it
was cutting the price of Marlboro Cigarettes by
20% (~40-50 cents a pack)
Phillip Morris stock price fell from $64.12 to $49.37
a 23% drop that represented a one day loss of ~$13
Billion dollars
3. Why did the Stock Price Fall?
Investors interpreted the price slash as an admission
of defeat from the Marlboro brand, that Philip Morris
could no longer justify its higher price tag and now
had to compete with generic brands.
The share value of other branded consumer product
companies, including Coca-Cola and RJR Nabisco, fell as
well. The broad index fell 1.98% that day.
4. Why did Phillip Morris Drop the Prices?
Economy was still Sluggish
Private labels had increased the quality and received
attention from customers and retailers
Hefty price increases in the recent times(~2-3 times a
year)
Stagnant growth with reducing market share in some
geographical areas
5. Marlboro- Company History
Worlds best-selling cigarette brand.
Flagship Brand of Phillip Morris-World’s largest
manufacturer of cigarettes
Forbes 26th and CNN’s 7th most valuable brand in the
world
It is also the worlds most profitable non-durable
consumer good
6. Marlboro Brand History – 1920’s-1954
Earlier positioned as a premium cigarette
The tip of the cigarette was colored pink to protect
women’s white teeth from yellowing
It was also positioned as a milder version of
cigarette that well dressed man smoked after dinner
Advertising slogan was “Mild as May”
7. Marlboro Brand History – 1954-99
Philip Morris tried to change this image and target
more financially attractive group – young males.
Leo Burnett, an advertising agency was responsible for
repositioning, came out with the idea of presenting
Marlboro brand through archetypal masculine characters.
The cowboy character was the first in the lineup and
the only one was hugely successful
8. Marlboro Man-Success Story
It transformed a feminine campaign, with the slogan
"Mild as May", into one that was masculine, in a
matter of months.
There were many Marlboro Men. The first models
were a Navy Lieutenant and Andy Armstrong.
9. Marlboro Man-Success Story
Within just a year Marlboro from niche brand with 1%
market share went to top 4 position in the U.S. market
It was successful because of the
1.Use of archetypes
2.Visual semiotics
3.The Savanna Principle.
10. Marlboro Country-Advertising Extension
In 1964, the company revived the cowboy but this time he
was in mythical Marlboro Country.
This vivid image paid off in 1971 when cigarette ads were
banned from TV.
The striking print shot of cowboys enjoying a smoke on
horseback continued to fuel sales growth. In 1972, Marlboro
became the No. 1 tobacco brand in the world.
11. Marlboro Friday- Context
Phillip Morris had steadily increased the prices of
cigarettes(2-3 times a year)
Price of a pack of Marlboro’s more than tripled between
1980 and 1992.
There was a $.8-$1 difference between premium brands and
discount brands which increased sales of the discount brands
Marlboro’s Market share dropped to 22% and it would have
further dropped to 18% if Phillip Morris did not do anything.
12. Marlboro Friday- Consequences
By cutting the price, Marlboro was able to narrow difference
to $.4
It was able to woo back customers who had switched to
other brands of cigarettes
Within 9 months, Marlboro’s market share increased to 27%
Years later, Marlboro currently holds 42% of the Market
share and commands a price of $5.70 compared to
competitors $4.20
13. Concepts From Textbook- Price Bands
Consumers rank brands according to the price tiers in a
category
Within any price tier, there is a range of acceptable prices
called price bands.
In some cases consumers infer the quality of a product on
the basis of its price
They use the perceived quality and price to arrive at an
assessment of perceived value
14. Concepts From Textbook Value-based pricing strategies
Perceived value is often a factor in purchase decisions
Thus marketers have adopted value-based pricing strategies-
attempting to sell the right product at the right price.
Hence price has multiple meanings and can play multiple
roles to consumers
15. Understanding Consumer Price Perceptions
Only a few consumers can recall specific prices of products
accurately
When observing a price, consumers compare it with internal
frames of reference(prices they remember) and external frames
of reference(regular retail price)
Most research has found that unpleasant surprises(like stated
price higher than perceived value) have a high impact on
purchase likelihood.
16. Lesson 1 from Marlboro Friday
Strong Brands can command a price premium
This price premium should be within the acceptable
range of the consumers
By cutting the price of the Cigarettes Marlboro
brought the price of the pack within the acceptable
range of the price band
Consequently sales of the brand started to increase
17. Lesson 2 from Marlboro Friday
Price hikes without increase in the value can lead to
vulnerability
Evident from the fact that Marlboro faced competition
from lower priced private label cigarettes
In such cases the consumer is willing to trade down
as the brand does not justify the price it commands
18. Keys for success for Value-based pricing strategy
For effective value-pricing strategy a balance must be
struck between
1.Product Design and Delivery
2.Product cost
3.Product Prices
Proper Design and delivery can enhance value.
Consumers are willing to pay premiums when they
perceive added value in products and service
19. Keys for success for Value-based pricing strategy
The second key to success is to lower costs as much
as possible. Ask the question “Is the consumer willing
to pay for that?”
The final key is to understand how much value
consumers perceive in the brand and to what extent
are they willing to pay a premium over product costs
20. Summary
Marlboro reduced the price of its cigarettes by 20% which
led to stock price falling by ~26%
People perceived it to be the death of brand. In reality
the move was very successful with the brand quickly
gaining market share
Brands must price their product in the consumers price
reference band
Value based pricing strategy should be adopted for
sustainable competitive advantage.
21. DISCLAIMER
The current presentation is created as part of the individual
assignment in the Brand Management course under Prof.Sameer
Mathur in IIM Lucknow
