Should Philip Morris have cut prices? Essay

Published: 2020-01-22 20:31:17
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Category: Pricing

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Philip Morris has been a renowned company in the US. It is an international company which has invested in a diverse set of products in different fields or industries. Way back in 1992 the company had been performing well particularly on its cigarette sector. Philip Morris has had a brand renown for its quality in the entire World. This brand is the Marlboro. As at this date Marlboro enjoyed about three times more f what the nearest competitor possessed of the market share. Later sometime towards 1993, Philip Morris started experiencing reduction in its sales of its cigarette brands.

To recover the losses Philip Morris came up with a three point strategy which involved the Marlboro price promotion, a continuity program, and a discount brand strategy. The price promotion involved reduction of prices of premium brands and increasing of the prices of the discount brands (http://tobaccodocuments.org/pm/2023322984-2992.html ). It was argued by the Philip Morris top management that the price cuts was to bring about reduction in the gap between premium products and discount competitors in such a way that the customers base their choice of a brand on quality, image and preference other than considering the price alone. The aim of this was to regain their market share o the premium brand which had been going down day by day and bring about long term profitability of the strong brands.

From the aftermath of the introduction of the changes in the prices it became clear that this was not the right decision. After the price cuts many traders in the stock market saw signs of losing their money. This led to a sharp decline on the companys market capitalization.

        The strategy employed by Philip Morris involving price cuts is not suitable in their case because in the short term it may appear to bring about an upsurge in the sales volumes but the cost of doing business was expected to go up due extra efforts of advertising. In the long term this strategy may not have been tenable since the overall cost of doing business had to be affected. Customers are likely to consider quality rather than price. By lowering the prices too low ma tempt the company to lower the quality of the products so as to cope up with the costs of doing business.

The move by Philip Morris was also not right in the sense that when we look at the aftermath, one of its effects is a sharp drop of the Dow Jones stock on the day the strategic move was implemented. This is because here was fear of losing and investors sold off the stocks of other consumer products manufacturers like Procter & Gamble, Coca cola, and Quaker. This saw a drop in share prices of other tobacco stocks.

 Price cutting is not one of the best strategic moves to salvage dwindling sales of a product particularly a well established company like Philip Morris. This is because such a move is expected ton to bring about only short term gains whilst in the long term it may be disastrous. Philip Morris should have other means of survival such re-branding, changing quality, and the embarking on extensive advertising and sales promotion. Reduction I quality may be perceived by customers to mean a drop in the quality of the companys products and thus the idea of was ill conceived and implemented from the onset.

Another negative impact on Philip Morris through cutting down on the retail prices on its cigarettes is diminishing brand loyalty. This is because customers are deemed to feel that something is not right with their products. Customers can remain loyal to a brand even if it is expensive provided it is meeting their expectations of quality as well value for money. By reducing its prices, Philip Morris was drawing an extensive war of supremacy with its competitors who were likely to engage in high profile advertising campaigns to counter their move. The ultimate result would be reduction in the profitability of the company in the long run.

 A respected company like Philip Morris in the cigarette sector should not have engaged in price competition. This is because such a move could cause reputation damage to the company. Customers, suppliers and other business partners must have seen the impact their move had on the stock market the day they implemented their strategy. This could have acted to lower the reputation of the company across the board. This is particularly bad because it expects people to continually invest in their share which would not be the case with diminished reputation.

 In a nut shell reducing prices blindly by respected a company like Philip Morris did not sent good signals to the industry stakeholders and as such this was not the best move in the prevailing circumstances. The companys executives who came up with the decision to lower the prices should have considered the out come of the move both in the short term and in the long term. They should also have relied on results of a pilot test carried for a longer duration before rushing to implement this strategy. The test involving retailing at reduced prices in certain parts of the market was carried out for a short duration. This could not reflect the true outcome of its implementation in other parts of the market as well as its success in the long run.

  

Reference




Philip Morris Lowers Prices, available at:

 http://tobaccodocuments.org/pm/2023322984-2992.html, accessed on February 10, 2008

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