I read the piece referring Bigi Cola’s low pricing by my friend,Joel Ajayi, last week. My friend questioned the sustainability of Bigi Cola’s choice of low pricing and made some assumptions of what could or would have happened to Bigi if Coca Cola were to react by lowering their price at Bigi’s level, or a new mega-buck competitor decides to take them on a price war. I must commend my friend for raising such a thought provoking discourse on price, a topic not many are comfortable discussing. I also agree with him that low price is not a sustainable tactics in the soft drink market where giants hold sway and competition intense.
On a closer look, however, it seems to me there was little attempt to appreciate the fundamental objectives and the limited options available to them. Also, there was what seemed to me like an unverified assumption that Coca Cola had set her RRP (recommended retail price) at N150 and not somewhere between N100 and N150. I may be wrong but I am inclined to think that Coca Cola’s recommended retail price may be slightly below the actual market rate but higher than Bigi choice of entry price.
That said, permit me now to highlight other perspectives.
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Have we considered if there exists a clear and consumer compelling differential advantage in the cola drink market. A new product usually needs a differential advantage to position itself apart from entrenched competition. Bigi Cola had none. Size can only lead to a switch by less than 5% of the consumers.
The choice of price as a second differential point makes sense for Bigi Cola only in the short run – this for me, was their objective? Had they tried to launch at the going rate, they would have required more distribution or promotional efforts. Achieving distributional depth does not automatically guarantee consumer off-take neither can they match Coca Cola on promotion. So, what other alternative incentive could Bigi realistically have given the consumers as an incentive to switch?
The other perspective is that Bigi Cola’s marketing team may have noted the fact that their market leader, Coca Cola, does not have a recent history of frontal price reaction. Therefore, it is safe to say there is no price war between both brands.
The foregoing points simply tell me that Bigi Cola’s choice of size and price differentials were a short-term strategy to gain presence and not dominance. They were obviously not seeking market dominance in which case you will expect Coca Cola to react. They only sought to gain market presence with the intent to increase price as soon as their market share reaches a satisfactory level.
The question of low price sustainability will arise if Bigi Cola’s market entry objective is dominance.
Bigi was simply one of the little Chihuahuas nibbling at the heels of the elephant. Dominance is not possible for them in the short-term especially given the market saturation and the massive positive brand perception Coca Cola had achieved. The truth is, without significance differential advantage, everyone else had to queue behind and that is what Bigi did. Their relative success, which caught our attention, is attributable to their ability to combine bigger size, astute distribution and lower price. This also may not have happened if retailers were not selling above Coca Cola’s RRP.
Another factor that may have prompted Bigi Cola’s adoption of penetration pricing that is often overlooked is what is called ‘the experience curve effect.’ Bigi may have sought to bring down cost by using increase in production arising from the resultant higher sales owing to low pricing. Survey shows that many products unit cost decline by about one-fifth when production doubles. Consider also the fact that the actual cost of the actual product is in reality far less than 20% of the going rate. The carbonated soft drink industry bulk costs are in human, machinery and marketing costs rather than on the actual product. Bigi may have pursued higher sales with the aim of achieving cost advantage. Although I doubt if this were the case, if it were, then they could as well dream of dominance. I also don’t see them achieving better cost economies owing to volume than Coca Cola.
Now we come to the other point – the assumption on what may have happened to Bigi if Coca Cola dropped its price to match Bigi or another mega-buck competitor taking further complicating the price war by offering lower that Bigi’s N100. Aside from Coca Cola not being reactionary, their market position posits that they can only use low pricing as a market entry barrier by making it difficult for others to enter the competition. That too is not feasible. Lower price isn’t in tandem with their brand positioning as the top industry brand.
If Coca Cola are to react they will do so in other way, not on price. This, I believe, they may have done.
In the same vein, ORide may be charging below Gokada to gain market footing and not to snuff others out. Joel, I hope you understand that this is a continuation of your discourse and not a call out?