Branding Brief - Marlboros Price Drop

By,
Musadhiq Yavar
PGP31389

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

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.

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

Marlboro- Company History

Worlds best-selling cigarette brand.
Flagship Brand of Phillip Morris-Worlds largest
manufacturer of cigarettes
Forbes 26th and CNNs 7th most valuable brand in the
world

It is also the worlds most profitable non-durable

consumer good

Marlboro Brand History 1920s-1954

Earlier positioned as a premium cigarette

The tip of the cigarette was colored pink to protect

womens 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

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

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.

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.

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.

Marlboro Friday- Context

Phillip Morris had steadily increased the prices of
cigarettes(2-3 times a year)

Price of a pack of Marlboros 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
Marlboros Market share dropped to 22% and it would have
further dropped to 18% if Phillip Morris did not do anything.

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, Marlboros 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

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

Concepts From Textbook Value-based pricing strategies

Perceived value is often a factor in purchase decisions

Thus marketers have adopted value-based pricing strategiesattempting to sell the right product at the right price.

Hence price has multiple meanings and can play multiple

roles to consumers

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.

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

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

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

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

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.

DISCLAIMER

The current presentation is created as part of the individual

assignment in the Brand Management course under Prof.Sameer
Mathur in IIM Lucknow