The adulteration of milk by Sanlu and a few other Chinese manufacturers in 2008, which resulted in the death of 6 and the hospitalization of 54,000 infants, left deep scars in the minds of Chinese mothers. In a market where premium infant formula was already a fast growing segment, its importance became even more pronounced after the scandal.
At that time a major manufacturer that produced both a low and a high cost variant of infant milk under the same brand name, considered the possibility of withdrawing the lower cost variant, in favour of shifting resources to grow the premium variant. To gauge the impact on consumer preferences that such an action might incur, this manufacturer undertook discrete choice modelling to simulate the impact of the withdrawal of the lower cost variant.
For illustration purposes, the two variants of this infant formula are referred to as X+ and X−. The cheaper variant, X−, targeted more price conscious consumers, had leaner margins and was experiencing declining sales. X+ on the other hand, was a premium product.
In general, if a brand is stretched in different directions, as was the case with X, its positioning tends to get fuzzy. This sometimes leads to confusion in consumers’ minds, and may vitiate the brand’s equity.
These reasons — i.e. consumer preferences, poorer margins, declining sales, fuzzy positioning — prompted the manufacturer to consider the withdrawal of X−. But if X− was to be withdrawn, the overall share of brand X would drop substantially. So one option considered at that time was to adjust the price of X+ to retain some of the loss in sales due to the withdrawal of X−.
Based on the results, from the discrete choice model, depicted in Exhibit 26.10, the manufacturer was able to deduce that with a 7.5% reduction in price, the premium variant could retain the entire share that the brand was likely to lose if the lower priced variant was withdrawn.
To elaborate, variant X+ had 6% market share and X− had 4% at the time of the analysis. Based on the study results, if X− was withdrawn, brand X’s share would drop from 10% to 8.2% (i.e. an 18% fall), and sales value would decrease by 5%. However, if at the same time as the withdrawal of X−, the price of X+ is reduced by 7.5%, the brand would retain volume share. While this would yield a 10% gain in value, without data on cost, it is not clear to what extent profits will be eroded. There may be the need to consider adjustment in pack size, or minor changes to product formulation, to partially restore margins.
Note too that while considering any drop in price, the manufacturer should also consider how competitors might respond. The scenario changes considerably if the price of some competing brands is reduced in line with X+. These alternative scenarios can easily be simulated with respondent level disaggregated data obtained from the model.
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