Parle G: Case Analysis
The Parle G case is a classic scenario where the price elasticity of a particular product is exceedingly high and any deviations as far as price change is concerned can have long term ramifications which could be in the form of declining sales, loss of market share consequently leading to revenue and profitability decline. At the outset it’s important to look at the case in a variety of perspectives and while we understand that it’s almost impossible to look into them individually, we have attempted to see the case from two perspectives:-
Overview of the Case:-
Parle G is the world’s largest manufacturer of biscuits by volume or tonnage and has been in the numero uno spot since a very long time. It has done so primarily by positioning its product, Parle G Biscuit, at optimally affordably rates which caters to customers from all walks of life especially the low income groups in the Bottom of the Pyramid. Of late, due to inflation and evolution of economic factors, the input of two major raw materials, sugar and weight which constitutes 55% of the manufacturing cost have risen provoking the management to rethink on the pricing strategy. The outcome of this inflation has resulted in the decrease in the margin it used to command. The dip has been from 15% to 10% of margins of its total revenues. Management is now mulling over to raise the price to reinstate the margins at 15% as previously mandated. Pravin Kulkarni, the GM of Parle Products has to take two major decisions regarding the above scenario and they are as follows:-
These questions needs to be addressed as soon as possible because of the presence of competitive products and companies in the same domain. The other very visible trend that management bore witness to, was the gradual migration of consumer spending to high-end biscuit segment belonging to the sweet, cream and milk categories. This trend was seen to be taking place within the portfolio of Parle G products and in the industry it was operating in.
The Pricing Strategy Decision
One of the methods to zero in on a pricing strategy is a careful analysis of the existing product viz a viz the price and the quality. Parle G biscuit, as can be inferred from the case, is a high quality biscuit with a low price. High Quality here does not mean premium biscuits as the like of Bourbon or Oreo; It means that the utility generated by the product is very high. To further elaborate, take the example of Nokia Phones that are available in the market. The range varies from INR 1200 (approx) to figures substantial than that. The lower segment phone still generates world class service that comes within such price. Hence, the quality being high and the price being low, the company has followed Penetration Strategy. This allows for the marketing objective of prioritizing increasing sales volumes or market share rather make profits. This method of Pricing has the following advantages:- •
It can create goodwill among the early adopters segment. This can create more trade through word of mouth. •
It creates cost control and cost reduction pressures from the start, leading to greater efficiency. •
It discourages the entry of competitors. Low prices act as a barrier to entry (Porter 5 forces analysis). •
It can create high stock turnover throughout the distribution channel. This can create critically important enthusiasm and support in the channel.
The major disadvantage of Price Penetration is that it establishes long term price expectations on the part of the consumers and hence companies find it difficult to raise prices later in the years to come. Studies have shown that switchers (bargain hunters) are attracted by such pricing strategies and that is the reason why Parle G witnessed a dip in sales after it went ahead with a price increase. We can further say that the huge...
Please join StudyMode to read the full document