Like many other companies, Procter & Gamble Co. (P&G)had to constantly alter its pricing strategies as it faceddeclining and shifting consumer demand for many of its productsfrom 2009 to 2011. Although the recession that began in December2007 officially ended in June 2009, P&G managers continued toface consumer cutbacks even on basic household staples. Rather thanpurchase P&G premium-priced brands, such as Tide detergent andPampers diapers, consumers chose lessexpensive brands, includingGain detergent and Luvs diapers. The P&G chief executive notedat the time that consumers were trying more private-label andretailer brands than they would in more normal economic times.1Because the company also faced higher commodity prices and globalcurrency swings, P&G officials raised prices in the firstquarter of 2009, developed new products, and increased advertisingto emphasize why their brands offered more value than thecompetition. Officials reported that the higher prices hurt salesvolume but increased total sales revenues by 7 percent. However,industry analysts wondered if the deceased sales volume wouldeventually cause the company to lower prices and increasepromotions.2 By spring 2010, P&G had reversed course and wasengaged in a market-share war by cutting prices, increasing productlaunches and spending more on advertising. The company’s goal wasto win back market share lost during the recession to lower-pricedrivals even at the expense of profitability. P&G lowered priceson almost all of its product categories during early 2010.3 Thisstrategy continued into the summer of 2010, although there wereconcerns at that point that the company had missed industry analystprofit estimates even though it had increased market share.Although the company announced that it intended to raise prices inthe first half of 2011, officials debated whether consumers hadbecome  accustomed to the lower prices. Industry analystsargued that the company needed to sell more products in thelowerpriced categories.4 The ongoing discounting reduced P&G’sprofits, which decreased 12 percent in the second quarter of 2010,because sales revenue rose less than P&G expected. To offsetthe negative effects of the lower prices, P&G introduced newproducts including Gillette razors that promised a less irritatingshave, Crest toothpaste with a “sensitive shield,” and Downy fabricsoftener that advertised keeping sheets smelling fresh for a week.The company also began moving into emerging markets such as Brazil,where its research showed that Brazillians took more showers, usedmore hair conditioner, and brushed their teeth more often thanresidents of any other country. The company planned to enter theBrazillian market in several new product categories at once, suchas Oral B toothpaste and Olay skin cream.5 Given continuedlower-than-expected revenue and slow sales in early 2011, P&Gannounced that it would cut costs but would also try to raiseprices on goods to offset the higher costs. P&G announcedinitiatives to eliminate some manufacturing lines and sell offsmaller brands. However, private-label brands continued to postlarger sales gains than brand names.6 In April 2011, the companyannounced a 7 percent increase in prices for its Pampers diapersand a 3 percent increase in the price of wipes. Surveys indicatedthat customers were less likely to switch to a cheaper baby productthan for items such as bleach, bottled water, and liquid soap. Thecompany hoped that parents would be willing to pay higher pricesfor diapers, even if they cut back elsewhere, in the belief thatthe higher-priced products were better for their baby’s comfort ordevelopment. P&G also raised the price of its Charmin toiletpaper and Bounty paper towels. One industry analyst concluded thatbrands that had the highest market share, were purchasedinfrequently (such as sunscreen or light bulbs), were necessities,had few competitors, or where it would be difficult to reduceconsumption (toilet paper) were most likely to be the productswhose prices could be increased. P&G, with its distinctiveitems, including beauty products, pet food, and toothpaste, waslikely to be better able to raise prices than Kimberly-Clark andClorox that operated in highly competitive product categories withlarge commodity cost pressures.7 By fall 2011, P&G reportedsolid sales growth and that it had successfully raised prices eventhough some of its competitors held back on their price increases.P&G had more ability to raise prices on its premium productsbecause company officials observed that higher-end consumerspending had held up better than that of lower-income shoppers, whowere still affected by continuing unemployment. P&G lost somemarket share in North America and Western Europe because itscompetitors did not immediately follow its price increases.However, company officials expected that the competitors would soonfollow P&G on its higher prices. This case illustrates how acompany’s pricing policies depend on how consumers respond to pricechanges. In the first quarter of 2009, P&G raised prices andthen reported declining sales volume but increased sales revenues.In subsequent years, the company lowered prices, which increasedsales volume, but did not increase revenue as much as expected sothat there was a negative effect on profits. Because the companywas concerned about consumer adjustment to lower prices over time,it also adopted other strategies to increase profitability, such asdeveloping new products and entering new markets. Thus, it appearsfrom the above case that consumer responsiveness to a company’sprice changes is related to 1. Tastes and preferences for variousquality characteristics of a product as compared to the impact ofprice 2. Consumer income and the amount spent on a product inrelation to that income 3. The availability of substitute goods andperceptions about what is an adequate substitute 4. The amount oftime needed to adjust to change in prices.

Question 1. What is the effect of the elasticity of a product onthe increase in price for that product.

Question 2. To what extent does consumer income, tastes andpreferences influence the demand for a product with a priceincrease.

Question 3. Using your knowledge of elasticity, as a ManagerialEconomist, explain the central issues and the various ways totackle the various challenges faced by Procter & Gamble