P&G was established in April 1837 with the merger of the candle-making business of William

Procter (Procter) and the soap-making business of Procter's co-brother, James Gamble (Gamble).
They set up a shop in Cincinnati, Ohio and nicknamed the shop "Porkopolis" as their candles and
soaps were made from the leftover fat of swine.
By 1859, P&G achieved sales of US$ 1 million. The company introduced Ivory, a floating soap,
in 1879. P&G was incorporated in the year 1890 to raise funds for further expansion and by 1904
P&G began focusing on building a business outside of Cincinnati to cater to a wider consumer
base. In 1911, Crisco, the first all-vegetable shortening was launched. In 1915, P&G built its first
manufacturing facility outside the US, in Canada. This facility employed about 75 people and
produced Ivory soap and Crisco. In 1930, P&G set up its first overseas subsidiary in the UK with
the purchase of Thomas Hedley & Sons Company Limited, which owned the popular Fairy soap.
In 1931, under the leadership of Neil McElroy, P&G's promotion department manager, the brand
management system was initiated...

The Scenario
In the early 1990's Procter & Gamble made dramatic and long-term changes in its pricing and promotion
strategy. Procter & Gamble (P&G), a leading consumer packaged goods producer, instituted a "value
pricing strategy" during which it boosted advertising while simultaneously curbing its distribution
channel deals (in-store displays, trade deals), and significantly reducing its coupon promotions. This
grand experiment leads us to a whole host of questions. What impact did the strategy have on brand
loyalty? How did competitors respond? What was the "bottom line" impact on market share?
In response to these questions, Scott A. Neslin, the Albert Wesley Fry Professor of Marketing at the
Amos Tuck School of Business at Dartmouth College, enlightened us in his presentation at the ZIBS
Forum held in February. Scott Neslin performed extensive analysis on the topic along with colleagues
Kusum L. Ailawadi and Donald R. Lehmann. For our ZIBS Forum, Scott revealed the secrets of their
investigation, and this report covers the salient points he covered.
The Details
What inspired P&G to initiate this value pricing strategy? First was logistical efficiency. P&G was
concerned with the cost of administering promotions, and the effect of up-and-down swings in demand
on the production system. Second, P&G was concerned with the impact of promotions on brand loyalty,
fearing that on one hand they attracted "cherry-picking" bargain hunters who could care less about the
brand, and on the other hand they weakened the loyalty of their core customers. It is also thought that
one of the prime architects of the strategy, senior executive Dirk Jager, personally disliked coupons
with a passion. These factors inspired P&G to break with standard marketing practices. As a result,
over the course of six years (1990 through 1996) P&G reduced its coupon expenditures by over 50%,
reduced its distribution channel deal expenditures by 20%, and increased its advertising expenditures
by 20%. This was truly a contrarian strategy as during the same period general market trends showed
an increase in promotion (deals and coupons) by 15% and a decrease in advertising by 20%.
What were the goals of value pricing? First, it sought to improve efficiency. The administrative and
production costs for promotions, deals, and coupons were becoming increasingly expensive and
cumbersome for P&G, distributors, and retailers. Second, since the theory was that coupons and deals
only invited brand switching and destroyed brand loyalty, cutting back on deals should leave P&G with
a stronger brand franchise. And to top it off, coupon fraud was also growing at this time with supposed
nefarious links to organized crime and terrorist funding. Cutting back on coupons would obviously sever
this link.
The Experts Microscope
Analyzing P&G's Value Pricing Strategy, Scott Neslin and his colleagues investigated how their strategy
affected brand loyalty, whether their customer base increased or decreased, how the competitors
reacted, and how the strategy affected market share.
To determine this, Neslin broke market share into three components: Penetration (PEN), Share of
Requirement (SOR), and Category Usage (USE).
PEN is the percentage of category buyers who buy the brand at least once; SOR measures brand loyalty
and is expressed as the percentage of category purchases in which the consumer chooses the P&G
product, among those who purchase the P&G brand at least once;
USE is an adjustment for heavy and light users. In summary, PEN is basically how many customers you
have;
SOR is how frequently these customers buy the brand (a measure of loyalty), and USE is whether the
brand's customers are disproportionately light or heavy users.
Using the following formula you can equate market share:
Market Share = PEN x SOR x USE
One could conjecture that, with their new pricing strategy, P&G's PEN would decrease, but SOR would
increase more than PEN and improve market share.
Neslin created separate regression models for PEN, SOR, and USE. To achieve this, he used P&G's price,
promotion, coupon, and advertising expenditures and the competition's price, promotion, coupon, and
advertising expenditures as independent variabes. He quantified these as the net price paid for an
item, percent sold on deal, percent sold with a coupon, and media advertising dollars. Neslin was
unable to include a specific measure for distribution but distribution is captured indirectly in the
catch-all "error term" of the model. Neslin's analysis shows that although price, advertising expense,
deals, and coupons (from both P&G and competitors) affect PEN, SOR, and USE, price has the largest
affect on the three market share components. Most interestingly, advertising had little effect on all
three components, and deals and coupons actually a slight positive impact on SOR. While this is
contrary to the view that promotions destroy brand loyalty, it may simply be due to the fact that
promotions keep consumers in the brand, whether because they love the brand or because they can
buy it at a decent price.
The Impact
From 1990 -1996, the net price paid by consumers of P&G products increased 20.4% (due to the
decrease of coupons use by 54.3%, and reduction in price cuts). Meanwhile P&G increased advertising
by 20.7%, and decreased channel deals by 15.7%.
What was the competitive reaction? During the same time period, the overall competition's (including
companies such as Colgate, Unilever, and Gillette) net price paid increased 10%, advertising increased
6.3%, deals increased 13.1%, and coupons decreased 17.1%. Of the three competitors, only Gillette
lowered prices and it increased coupons use by 127.6% -- far more than Colgate. Overall, the
competition did not completely cooperate with P&G, but neither did it take full advantage in a mad
grab for market share.

Market Performance Framework

What was the total impact on P&G? P&G's Value Pricing Strategy showed no change in share of
requirements or category usage, but it did end up with a reduced penetration rate, which declined
16%. This was because the cut in promotions resulted in fewer consumers buying P&G brands, and
neither the cut in promotions nor the increase in advertising had any appreciable effect on SOR.
Overall, P&G's market share decreased 16%. Although P&G lost market share, it is possible that its
profits remained stable or even increased. It lost 16% of share, but made up for this through increased
prices 20%, a lower cost of good sold, and efficiencies in production. However, the increase in
advertising expenditures may have wiped out most of the cost savings. Despite gain or loss in
profitability, P&G lost their strategic and esteemed position as the market leader in the consumer
packaged goods industry. Traditionally, P&G had a sharp focus on market share leadership as the
ultimate metric of success, and yet for the first time since the 1950s, Colgate overtook P&G's Crest
as the market leader.
What happened to P&G's theory that price promotions reduce loyalty? Was this myth or fact? Analyzing
P&G's value pricing strategy shows that promotion cuts decreased penetration but did not dramatically
increase loyalty. So, P&G's initial beliefs were myths indeed. Additionally, increasing advertising had
little effect on market share. Why? When you are the market share leader the effect of advertising is
diminished. Market share leaders already have high awareness levels, and unless your advertising
provides new compelling reasons to buy (usually rooted in innovative product differentiation) there is
little upside beyond maintenance advertising.
What was the effect of the competitive response? The competitors reacted to P&G's strategy in a way
that cushioned P&G's loss - the competition could have destroyed P&G, but P&G's losses were mostly
self-inflicted. Of the competitors, Gillette was the only one to take a contrarian strategy and was fairly
successful. What do you do about sharp competitors like Gillette? As we saw recently, P&G decided to
buy this one.
In sum, sustained cuts in promotion result in lost share in the long run. Sustained mass advertising
expenditure increases for mature, high share brands do not pay off in the long run. Mass advertising is
better suited for immature, low share brands. Finally, competitors may not "eat your lunch" if a
company chooses a strategy that makes them vulnerable. The competition likely faces the same
challenges as your company and may follow suit with policy changes.
Market modeling is a powerful tool. Response modeling entails using mathematical models to translate
the rich market environment into mathematical equations in an effort to quantify the impact of
marketing initiatives. Modeling competitive market response to major policy changes is important to
understanding the long-term results of those policy changes. The next major challenge for marketers is
predicting, in advance, how the market will react to future policy changes. When a major policy
change is implemented, it fundamentally changes the market; the rules of the game are changed.
Therefore, it is inherently inaccurate to predict the results of major policy changes based on historical
data because appropriate data does not exist.
It is interesting to note that P&G's value pricing strategy is quite a misnomer. During this period many
stores were switching to EDLP (every day low pricing) policies, which meant that consumers would save
on their overall purchase without having to deal shop. In contrast, P&G strategy essentially was a
disguised price increase; coupons were cut by 50%, which contributed to an increase in the customer's
price paid by 20%. It is possible that P&G lowered their wholesale price, but the retailer only enjoyed
higher margins and did not pass the savings on to the customer. Another possibility is that retailers
lowered retail prices consistently, following P&G's decrease in wholesale price, but once promotional
trade deals are factored in those everyday lower wholesale prices did not result in a lower total price
paid. For example, if P&G's old price was $20, but gave deals of $15, at which price 90% of purchases
were made, the wholesale price equaled $15.7 (.90*$15 + .10*$20). If P&G set a "Value Price" point of
$18, but 100% of purchases were made at that price, the retailer enjoyed no cost savings-only a cost
increase. If P&G had truly offered price cuts, their results may have been much different.
The Big Picture
The insights into P&G's grand experiment demonstrate to us the importance of promotional pricing, and
the diminished power of mass advertising for high share players. Analysis of P&G's value pricing
strategy allows us to see how major long-term policy changes, not short-term marketing mix changes,
affect market share and competitors' reaction. Studying P&G's value pricing strategy offers the unique
opportunity for marketers to analyze major policy changes, obtain clearer understanding of how
marketing mix changes affect brands, learn about long-term impacts of marketing changes, and inform
future policy decisions. And it is also important to note that success can be measured more than one
way. In essence, the P&G grand experiment may have been successful when measured by profits, and
at the time those profits were being used to invest in new innovations. However, for a company that
traditionally measured success by volume (market share) its value pricing strategy truly had a large
enough adverse impact on share that it was eventually abandoned.

Consumer products manufacturer Procter & Gamble Co. is said to be ending its 77-year run as a
prominent sponsor and producer of soap operas — a genre the company helped create — in favor
of producing more campaigns using social media.
The switch from soap operas to social media is one motivated by its success with previous social
media campaigns — such as its Old Spice Guy YouTube promotion — and a desire to capitalize
on the more readily available opportunities of reaching women through digital media.
Digital media has “become very integrated with how we operate, it’s become part of the way we
do marketing,” marketing chief Marc Pritchard told the Associated Press. “It’s kind of the oldest
form of marketing — word of mouth — with the newest form of technology.”
The company is an important advertiser that spends nearly $9 billion per year to advertise its
products. The company is finding social media sites such as Twitter, Facebook and YouTube to
be more effective channels for reaching women and has spent much of 2010 experimenting with
campaigns in these arenas.
“We continue to advertise during daytime TV including soap operas as a way to reach
consumers,” a company spokesperson tells Mashable. “In our marketing approach we build our
brands based on the appropriate integrated holistic marketing campaign that reaches the
consumer when and where they are receptive. As consumers spend more time online and via
social media networks, our brands are naturally adding these options to their marketing plans as
it helps them engage and serve consumers.”
The P&G business dates back to the mid 1800s when it began as a soap and candle-making
company. The company started sponsoring radio programs — which became known as soap
operas — in the 1930s when radio was emerging a popular medium.
1) Selling to More Consumers in Existing Markets
To realize its goal of acquiring one billion additional consumers by 2014-15, it comes as no
surprise that P&G is focusing on the two most populous nations in the world – China and India.
While targeting volumes at lower price-points, P&G has launched lower-priced product
extensions of its global premium brands such as Tide and Gillette targeted at consumers with
lower disposable income levels in these economies and expanded its distribution network to
cover the previously inaccessible rural areas. While the U.S. and Western Europe continue to
constitute over 41% and 21% of sales respectively, going forward much of the growth is
expected to come from the emerging economies, which have been exhibiting robust double-digit
growth primarily on account of expanding middle class with rising disposable income levels and
high population growth rates.
2) Selling More Products to the Existing Consumers
Very apt for this period of uncertainty, under McDonald’s leadership P&G has set out on a
relative performance goal – to grow 1-2 percent points faster than global market growth, of
which half is expected to come from market share gains (a reasonable 0.1%-0.2% gain in share
per year for the next 5 years) in the existing product categories while the other half shall be
drawn from “white space” growth i.e. launching more product categories in more countries and
launching product extensions of established brands.
While P&G competes in 35 product categories in the U.S., it is only present in an average of 19
product categories globally. The “white space” growth primarily focused on launching more
product categories in more countries. P&G is targeting expansion of the global average to
presence in 24 product categories by 2014-15.
3) Selling Products through More Outlets
P&G currently sells broadly through four channels: 1) mass volume retail (Wal-Mart, etc.), 2)
mom-and-pop stores (which dominate emerging markets), 3) wholesale and 4) modern retail
stores. P&G is focusing on expansion in the international pharmacy and e-commerce channels.
This shall contribute to P&G products being available at more outlets.
P&G is essentially relying on cost efficiencies leading to operating margin improvements of the
tune of 350-450 basis points to fuel the above top-line growth. While most of these cost savings
are expected to come from scale, such as sourcing of larger volumes of raw materials at more
competitive prices and dilution of SG&A over larger volumes, P&G is also targeting
improvements in production planning and business-planning cycle time to improve operating
margins.