There was Shiv Nadars HCL (then Hindustan Computers Ltd) which practically whitewashed competition in the personal computer market in the 1984 by first advertising PCs for Rs 50,000, when everyone else was selling them for Rs 1 lakh plus. And then, when the rivals reacted and brought their own prices down, cut the prices of HCL Busybee PCs to Rs 25,000 and swept the market. At around the same time, there was Karsanbhai Patels Nirma, which showed giant Hindustan Lever a thing or two about selling detergents by simply developing and selling a detergent powder at half the price HLLs Surf was selling for.
Of course the way Gulshan Kumars T-Series cassettes prised open the audio market and stole customers from right under market leader HMVs nose by retailing cassettes in every nook and cornerside shop at rock-bottom prices is the stuff of legends. And finally there was the Dhoot brothers Videocon which hijacked the colour television market in the mid-eighties by offering more features for less price than any of its rivals and waltz its way into marketing history.
At the fag end of the nineties, the four legends have all grown into big respected names. But along the way, the sheen in their success stories has been slightly tarnished by their experiences in the marketing battlefield. Because while all four did succeed spectacularly in prising open some markets, they have also tasted bitter failure in several other markets they entered.
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Strikingly, all four tripped in exactly the same manner. They tried replicating the same price slashing tactics that had earned them fame in their first markets into a host of different product categories. And in the process learned an important lesson strategies have to be tailored to a market but a market can never be tailored to a strategy. Their experiences in defeat, in fact, have much more to offer the marketing student than their success stories.
Missing the big picture twice
Gulshan Kumars Super Cassettes Industries (SCI) has used simple, and brutally effective, tactics while stealing the market from under leader HMVs nose. There was two components to the strategy. One, selling the audio cassettes (T-series) for Rs 15 at a time when HMVs own cassettes retailed for Rs 35-plus. And two, making T-series available at as many outlets as possible, even grocery and pan-beedi shops, while HMV and the other big names were restricting supplies to just music shops.
But in its way to becoming the undisputed champ of the audio cassettes market in the mid-eighties, SCI missed the big picture. Essentially what it overlooked was the fact that a price warrior ends up developing an image of shoddy quality almost by default.
This issue is still plaguing SCI. Initially, in its attempt to keep prices at rock-bottom levels, SCI used second-hand recording equipment and not-so-good cassettes. That made sure that T-series came to be known as a cheap, poor quality product to be used for some time and then thrown away. Later, when it was selling in big enough numbers, SCI did upgrade its quality by setting up an integrated cassettes manufacturing facility and a modern recording studio. But the quality perceptions about the T-series name always remained.
This was what ultimately proved its undoing when rivals decided to attack from both flanks. On one hand, the low quality tag meant that rivals could segment the market by introducing different brands at different price points while T-series was never able to graduate to the higher margin premium segment. (A strategy that HMV followed by launching the Economy series - at Rs 22, Popular - at Rs 29, Supreme - at Rs 42 and Sheer Magic - Rs 100). On the other hand, the unorganised sector ate into its share as they paid no excise or sales tax, and could sell their cassettes even cheaper than T-series.
Today, T-series is no longer the same force to reckon with in the audio market. Worse, when it tried to use the same price warrior tactics in another market, it came a cropper. When SCI diversified into detergents, the underlying philosophy was the same. Fight on low price. It launched a white washing powder pitted against Nirma and a blue washing powder against Surf at Rs 15.50.
To cut costs, it decided to restrict itself to northern India so that it saved on freight cost which it could pass on to the dealers. This in turn should have helped it win dealer loyalty. As it turned out, it didnt. Because by the time it entered the detergents market in the nineties, the scenario had changed completely. Price warriors like Nirma had spawned a number of imitators and a number of low-priced detergents were available in the market. And in a bid to attract dealers, every detergent marketer had hiked margins. The T-series detergent margins were just not attractive enough for any retailer to show any interest in pushing it. Worse, the retailers had incentives from other detergent sellers a wider portfolio of products like toothpastes, shampoos and soaps which T-series couldnt offer. And hence, its bargaining position was too low with retailers.
In the end, it turned into a vicious cycle for T-series in the detergent markets. To really attract retailers into pushing its brand, it needed big enough volumes to make it worth the retailers while. But without the retailers actively pushing it, it could never ensure that kind of volumes. The result: sales turnover from detergents was a meager Rs 15 crore in 1994-95. The Rs 3 crore invested in plant and machinery has been practically wasted as the capacity is mostly lying idle.
Is the customer really looking for low price?
Perhaps it was not asking this question of themselves that tripped up all four at one time or the other. HCL, for example, made several tries to win the EPABX and the photocopier market but tripped up by misunderstanding the consumer psychology in these markets. In the EPABX market, HCL tried to replicate its cut price formula by offering a wide range of products with minimum features. Unfortunately, unlike the PC market where one PC was very much like another, features played a big role in the EPABX market. And HCL was in the EPABX market by rivals who invested in bringing in more sophisticated models with all the frills.
In the photocopier market again, HCL came a cropper time and again by focusing only on price and ignoring all the other factors. In 1984, the then Hindustan Reprographics Ltd (HRL) was set up with an investment of Rs 4 crore in the manufacturing facility in Dehradun. Its focus being price alone, it tried to derive a cost advantage by outsourcing parts and assembling them. But as a manager, vendor development, Modi Xerox points out, There were hardly any supplier of quality parts at that time. In fact, even now, we manufacture the critical components ourselves or import them.
Further, Modi Xerox's investments were 10 times more than HRL and went about gradually developing local vendors. This is critical as a photocopier is a complicated product, unlike the computer. It has mechanical parts, electrical to electronic parts and chemical part - all working in tandem. And the wear-and-tear factor is infinitely greater in photocopiers than in PCs, which are almost entirely electronic in their makeup.
Thus manufacturing quality, and the ability to provide components and service in time, is extremely important in a product like photocopier.
And by trying to keep costs low, HCL tripped here. There were few people willing to buy a photocopier for Rs 70,000, say, which constantly broke down and for which parts were not easily available, when they could get a hasslefree photocopier for Rs 1,00,000.
HCL (then HRL) continued down the low price plank too far. It indigenised the Toshiba machines it was selling to offer a even bigger price differential. And quality glitches only increased further. At one point the production came to grinding halt for nine months.
In photocopier business, the business operates on a referral system.
Almost 60 per cent of the sales come from the existing customer. This is because as he starts using the copier, his photocopying requirement usually goes up. For such a customer his experience with the existing machine matters more than the price - while considering a repeat purchase.
The result: the company, which has the capacity to make 6,000 coated paper copiers made none during the last two years. It churned out 1,973 plain paper copiers in 1994-95, against the installed capacity of 10,000 units.
Videocon had much the same experience when it tried out its ultra low-priced Budgetline series. It ignored the fact that the customer had got used to certain features in colour television sets. For example, four or five years ago, a remote control was a luxury. But now, with over 30 channels on offer, it had become a standard for anyone looking for a colour television. Last year, when it introduced a 14inch colour Budgetline TV without remote for Rs 7,999. However, it failed to attract enough buyers because of its lack of features.
The same lessons were brought home forcibly to Nirma when it branched out into making shampoos and beauty soaps. Both being personal care products, the customer was far more fussy than Nirma anticipated. While Nirma Beauty is not doing too badly, it has got slotted against popular brands like Lifebuouy, and not any of the more popular middle market soaps. Thats why its niche has got limited. Similarly, in shampoos, Nirma faces a disadvantage because the consumers looking for low unit price can choose satchels of any brand like Sunsilk and Velvette. Though Nirma claims that its shampoo is doing well and has grabbed a 7 per cent market share, other players dispute those figures.
The T-series colour television sets ran into much the same hurdle. Priced at Rs 8,000-odd for the 14 inch set, they are selling barely 1,000 units a month against a target of 3,000. And T-series has never been able to become even a medium sized player in the colour television market.
What T-series had ignored was that unlike audio cassettes, which were a low value, short-term purchase, or even black & white televisions (which were again a medium-term purchase for people waiting to upgrade), most people expected to use the colour television they bought for at least eight years or so before going in for another model. Thus, they would be willing to pay a slightly higher price to reach a minimum threshold of quality/features. And the cheapest set was unlikely to be a big draw for this class of customers.
And, it confronts the same problem in the CD market. Despite a Rs 200 price advantage, the company struggles to grab volumes. One reason is that at present CD player owner is exposed/used to international quality CDs. So the market for its CD hasn't grown. Conversely, expensive CDs have so far kept away many potential customers from buying a CD player.
To break this vicious cycle, and broadbase the market, SCI has introduced CD players with built-in amplifiers - the only of its kind of product for Rs 3,500. It was putting its bets on creating a new market segment. The problem with this is that the customer who can afford a Rs 65 CD is reluctant to buy a T-series CD player and the one whose quality awareness is not high will not be able to buy a Rs 65 CD. Besides, a CD player is a status symbol as well. Thats where the T-series brand name becomes a bit of a handicap. That is reflected in the fact that most retailers in the posh south Delhi do not even keep the brand.
The company claims that it selling around 1,500 CD players per month and aims at an ambitious figure of 10,000 next year. Our aim is to cater to the mass market, says A N Sehgal, director, SCI. That seems unlikely given the current size of the CD player market. The price being so low it is perhaps unwise to look at the product in the context of the conventional CD player market.
And bringing about transition in market structure requires heavy adspends - something SCI is unwilling to do. For that matter SCI has been too single minded. It has almost ignored all the Ps of the product mix other than the price.
First come, first served
One common mistake both Nirma and T-series made was not realising that often the low price works as a weapon only if you are the first to offer it. If you are the fifth, seventh or twentyfifth player offering low price, you can never hope to win the market.
T-series made that mistake when it came into the detergents market. It was not only taking on Nirma, the original low-cost detergent, but also the dozens of Nirma clones that had flooded the market in the interim.
Similarly, when Nirma launched its shampoos, it was not the first to offer a cheap option. Velvette had already usurped that plank. And now that Nirma had made a foray into toothpastes, it has to contend with other cheap toothpastes which entered first like Babool.
Problems of sustainability
Ultimately, as all these players are finding out, the biggest problem with the low-price strategy is the difficulties in sustaining it. Essentially, each of these players had started out with rock-bottom pricing because they had low overheads and all manner of other advantages. Today, much of that is vanishing and each is finding a host of competitors willing to play the price game with these old champs.
HCLs PCs are no longer the cheapest branded personal computers in the market. PCL holds that distinction. Nirma is not the lowest priced detergent either. There are at least a dozen regional brands which offer cheaper prices. Akai is matching Videocon feature for feature and price for price. And giving the kind of promos which are pulling away not BPL or Onida buyers but the price conscious Videocon buyers. T-series has to face a host of unorganised players who pay no excise or sales tax and hence can undercut even the original low priced cassettes.
Can low price ever be a sustainable advantage? The example of Japanese and Korean giants like Matsushita, Akai and Goldstar does show that it can. But it is a game that can be played only if the volumes are big and enough money has been spent on developing consistent quality and a good brand name.
For the Indian players, volumes have just not been enough. The Japanese and Korean giants have the advantage of economies of scale because they play in dozens of markets simultaneously. The Indian market by itself is not big enough to give that kind of advantage in most products. (The exception would probably be detergents where Nirma is one of the biggest selling detergents in terms of volumes.) And consequently, the lack of volumes has meant that enough money was never spent on developing a brand image of consistent quality and reliability two factors that are increasingly becoming as important as price in almost every product category. And that is why the legends are now finding that price alone is not enough.