The Price of the Month. Success or Failure?

09/2010: Valio Milk Plus 1l starting at 1,39 €

Posted in Pricing by Jouko Riihimäki on 30.9.2010

In small consumer markets (=Finland) there are a few operators both in industry and business. The cake sharing competition between the various operators causes occasionally price competition in different products in retailing, for example in loss leader products. These products are e.g. beer and milk. The beer war has been on regularly already since 2005. The beer price is still low, although there have been several increases of alcohol taxation to fix the situation. However, in this article I concentrate on milk and the milk war as well as the pricing of Valio’s novelty product – Valio Maito Plus™ (Valio Milk Plus).

Background of the milk war (=price war)

According to the Business Dictionary, price war can be defined in the following manner: Market situation in which (usually two) powerful competitors try to usurp each other’s market share by progressively reducing prices until one of them retreats, at least temporarily.

The latest milk war in Finland started in 2009. The following is an analysis by Talouselämä on 15/4/2010 about the backgrounds of the milk war.

Valio and Finland’s milk markets have been the innocent parties in the European Union’s milk war. EU allowed milk producers who were drowning in their debts, especially in Holland and Denmark, to increase their milk production the year before. That cheap milk has spread across the borders. Finland’s misfortune is being too close to Denmark who produces plenty of excess milk. The over production of milk spills to Finland in the forms of very cheap cheese and now it also includes Swedish basic milk.

Valio started its defense – on the other hand with an image campaign and by introducing its own cheap cheese products and yoghurts. No Nobels are won by the developers of these products, but they have balanced the skid of the market share. New cheap products indicate that Valio, who is usually calm in public, can play a hard game. The over-production problem has still not been solved. EU started intervention purchases last autumn. When the Union decides to unload those stocks, more pain is coming up. Valio’s return was profitable last year. Talouselämä calculated a grade for Valio and it improved to 7,5 out of 10. But who cares about those numbers. Valio’s return shall be evaluated in a different way, not like the result of most companies. Valio is owned by 9 500 Finnish milk producers. Valio’s purpose is to offer them livelihood.

Below is a figure of Valio’s central key figures in 2005-2009. The table also includes Arla Ingman’s and Arla Foods’ (Sweden) economic information during 2008-2009.

The Talouselämä analysis observations should be taken into consideration in the economical key figures. It does not remove the fact that the correct pricing has a remarkable effect both on Valio and the Finnish producers.

Operations in the price war

The basic logic of the price war is that price reductions are made one after another, the first reduction causes a series of reductions, and the war continues until the central operators stop this so called anti-auction (=the lowest price wins). In this kind of rapidly changing situation, the actual purpose can be forgotten, and operators concentrate on winning the competition instead of developing their own operation in the long term.

Various strategies and tactics can be used during the price war, as this quote from Wikipedia shows:

    1. Reduce price: The most obvious, and most popular, reaction is to match the competitor’s move. This maintains the status quo (but reduces profits pro rata). If this route is to be chosen it is as well to make the move rapidly and obviously – not least to send signals to the competitor of your intention to fight.

    2. Maintain price: Another reaction is to hope that the competitor has made a mistake, but if the competitor’s action does make inroads into a merchant’s share, this can soon mean customers lose confidence and a subsequent a loss of sales.

    3. Split the market: Branch one product into two, selling one as a premium and another as a basic. This effective tactic was notably used by Heublein, the owner of the Smirnoff brand of vodka).

    4. React with other measures – Reducing price is not the only weapon. Other tactics can be used to great effect: improved quality, increased promotion (perhaps to improve the idea of quality).

According to Kauppalehti on 22/9/2010 , Valio has a new weapon in the milk war:

Valio has lost its basic milk market share for Arla Ingman, so the company concentrates on introducing new special milk products. In September new vitamin milk, Valio Milk Plus, arrived in the stores, which has plenty of added D-vitamin, calcium and protein. It is marketed for children, the elderly, and it is a recovery drink for athletes and weightwatchers. The vitamin milk is almost twice as expensive as the normal milk. Valio believes that the same amount of vitamin milk is sold in 10 years as lactose free milk is sold now. Lactose free milk is sold for 150 million euros per year.

Pricing review

Because the other means of the price war, such as launching novelty products, are more challenging than a mere price reduction, I started making the monthly price evaluation of the previously mentioned Valio Milk Plus novelty product. According to Valio’s annual report (2009), Valio introduced 68 products in total on its domestic markets last year, and the turnover share of novelty products (less than 5 years on the market) was 28,3 %.

I started my research regarding pricing from Philip Kotler’s well known 4P model’s point of view. The model states that the decision areas of the competition method are Product, Price, Place and Promotion. I end this evaluation with price.

Product

According to Valio, Valio Milk Plus product is super milk.

Valio Maito Plus™ (Valio Milk Plus) is a new extra nutritious milk for people of all ages and for many different uses. Fat free Valio Maito Plus™ contains more nutrients than basic milks and so improves exercise recovery, enhances muscle growth and assists in weight management. For senior citizens it contributes a good dose of protein, calcium and vitamin D to their diet, maintaining bone structure and muscle fitness. Valio Maito Plus™ contains more key milk nutrients than ordinary fat free milk. That means twice the amount of vitamin D and 50% more protein and calcium. Valio Maito Plus™ is also a good source of B group vitamins and contains added potassium, plus added folic acid which is especially important e.g. for pregnant women. Its high protein content gives Maito Plus™ a fuller taste,” says Valio Nutrition Expert, Marika Laaksonen, D. Sc. (Food Sci.). .

The Product promise, wide target group thinking and the contents of the product seem to be very promising. We Finns are indeed milk people: The average Finnish milk consumption is 137 litres annually, and Finland is number one in milk consumption in Europe. Additionally, several objective researches support the positive health effects of milk. Some opposite results have also been presented.

20/9/2010 Iltalehti: Tripeptides from casein proteins which can be found in milk abundantly may improve the blood vessel operation in long term use. Thus, they can even prevent hypertension. The research made by pharmacist Pauliina Ehlers showed that a sour milk product including tripeptides and phytosterols also lowered slightly increased blood pressure.

Place

In order to survey the availability, I chose to go and visit some grocery stores. During September, I visited in nearly 20 grocery stores in Espoo, Kirkkonummi, Lohja, Raasepori, Salo and Tuusula. I also surveyed the price and availability in Internet grocery stores, such as gastronautti.fi -webpage. The grocery store chains included in this survey were K-citymarket, K-supermarket, K-market, Prisma, S-market, Sale, ABC, Valintatalo, Siwa and Lidl.

The product was well available. Only some of the smallest stores had not taken the product to their shelves. One question regarding the pricing is that is the good availability due to the correct price or Valio’s good (dominating) market position. The product was placed in the fridges with other milk products but its shelf space was quite limited, and it did not especially stand out for consumers.

Promotion

Let’s start with the name of the product. Valio Maito Plus™ (Valio Milk Plus) is a good name for the product and it tells the consumer and the target group directly the most essential thing: It offers something extra in addition to the basic milk. Valio has applied a trademark protection for the name on 11th August 2010. I was wondering the fact that Valio had not applied the trademark class 29 (e.g. milk products) separately for the Plus-name or other corresponding combinations. This procedure would at least slower the competitors’ opportunities to launch their own products with the Plus-name or a similar combination, when a good product concept can be copied quickly including the name. Here Valio has surely investigated various opportunities regarding the trademark protection.

The package is an important part of promotion. I think that the starting point in the package was made from the point of view of the productional and mass market because the product was launched in a traditional milk carton of 1 litre. The chosen package is surely the most economic option regarding the production and an easy choice for the consumers, but I would have given extra points for trying to introduce new package innovations as a part of the launching. Hopefully we will get to see them later on. The package emphasizes visually the traditional image and I think it did not stand out clearly enough on the shelf. As a conclusion, Valio has played safe regarding the package and was therefore not guilty for any gimmicks or anything excess. When considering the pricing, this package solution outlined the opportunities for a higher price level (Premium Pricing), but at the same time, because the message was to offer the product for a wider target group with a moderate price level (Mass Marketing).

The product was marketed widely to consumers in different public media from television to Internet (consumer marketing). I believe that the consumers’ awareness of the novelty has been reached, but it is good to remember the golden rule of marketing i.e. REPETITION. In order to succeed, it is important, that trade marketing supports consumer promotion, because purchase decisions take place not earlier than when the consumer is inside the store. I did not especially see any consumer marketing. This may be due to the fact that Valio’s opportunities for consumer marketing promotion are limited.

Price

The price of Valio Milk Plus was set between 1,39-1,49 euros in the grocery stores. The price did not depend remarkably on the size of the store, e.g. the product had the same price in Kilo’s Siwa or Sello’s Prisma. This shows that the product price was not a central criterion for the purchase, but the other factors of the product. The pricing of this novelty uses Price Skimming, whereas basic milk pricing uses EDLP-pricing (Every Day Low Price) in retail business.

I also wondered whether it would have been reasonable to use aggressive pricing in the launch and then increase the price later on to a slightly higher level (Penetration Pricing). I ended up in the result that for Valio, as a market leader, this choice would not have been reasonable. One option would have been premium-pricing. The price of the product would have been remarkably more expensive than the peer products (see table). I think that with the package solutions made (type, size etc.), premium-pricing would have been wrong. Based on the properties of the product, premium-pricing would have been possible, because the product value for the consumer is high (Value Proposition). Below are some comments on webpage http://www.pakkotoisto.com:

ticotaco 25/8/2010: This new thing from Valio is absolutely great. There is 1,5 times more protein compared to normal milk and the amount of D-vitamin and calcium has been increased i.e. you get 10 g of protein of one glass (2 dl) I don’t know about the price, how much it is…

Kaapeli 26/8/2010: I bought also that from Sittari for 1,39e today. Even 50 grams of protein per carton and in addition, D-vitamins are such a good package, that I think I’ll try to start drinking milk. I don’t think it will become more expensive than having cottage cheese, sour milk and yoghurt.

Nightkin 27/8/2010: The price is quite relative. For someone who works, that price makes no difference and the liquid can have its own position, but it has a bigger effect e.g. in a student wallet. On the other hand just what Force said there; the same Valio’s stuff can be bought as Milbona or as a Swedish Arla for half the price,, when you can also choose the calorie amount. There’s so little D-vitamin there, although its amount is ten times higher.

This product was very well priced, because it provides additional value for the store and for Valio. Valio Milk Plus (1,42 euros) is approx. 70 % more expensive than Valio’s fat free basic milk (0,85 euros) and the competitor’s corresponding Swedish fat free basic milk is nearly 120 % more expensive (0,65 euros). The thing I wondered the most in the product pricing was the positioning of the price in comparison with the peer products (see table). It was set on a lower level than organic- and lactose free milk, although the value promise for the consumer (health and wellbeing) is high. Because pricing in this evaluation is only a part of the 4P model, regarding the choices that were made (the other P:s),the pricing was traditional, but quite exemplary. However, it did not produce any surprises, either.

One general observation in the grocery stores was that the category pricing of milk products uses different pricing methods quite concisely. The price is either very low or relatively high. When pricing milk and other products, it shall be taken into consideration that the final consumer price decisions are made in the store, on which the supplier influences with his own sales price. The final consumer price depends on the margin target of the product which is set by the store, which may be low e.g. in the loss leader products, such as basic milk. The objective of the store is not necessarily to optimize the profitability of the product, but customer loyalty and basket profitability.

As a conclusion I believe in the success of the product launch and that the product will remain in the store selection for a long time. This product and other similar products with additional values can effect on the consumers’ purchase behavior on its own behalf, so that they will move from basic milk towards milk products which produce additional value.

Pricing Stars (1-5):

Jouko Riihimäki, M.Sc, CPP Certified Pricing Professional

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