Promotion

Looking at the various methods of promotions being applied to cigarettes:

1. Advertising - Banned in India

2. Sales promotion - Banned in India

3. Events and experiences - Recently banned (Godfrey Phillips India was fined for promoting its cigarette brand 'Marlboro' by demonstrating its association with a Ferrari in the Indian Grand Prix).
4. Public relations and publicity - Use surrogate marketing
5. Direct Marketing - Promotion/banners at the point of sale

6. Interactive marketing - None

7. Word-of-mouth marketing - Major method of marketing

8. Personal selling - None

In India, even though cigarette advertising is banned, the distribution network is so strong throughout the country that this category itself has become the biggest FMCG in India in terms of Sales (Rs. 80,000 crore in 2012, according to the MOHFW) . So, marketing efforts really become inconsequential at this stage.

Laws that ban promotion of cigarettes are:

• The Cigarettes (Regulation of Production, Supply and Distribution) Act, 1975
• The Cigarettes and Other Tobacco Products (Prohibition of Advertisement and Regulation of Trade and Commerce, Production, Supply and Distribution) Act, 2003
• The Cable Television Networks (Regulation) Act, 1995, and The Cinematography Act, 1952

On the other hand, when you talk of enhancing "visibility" in the market, advertising for Cigarettes has a different meaning altogether - Surrogate Advertising as it is called (am sure you would be aware of it) is commonly used.

Primarily, two modes of Marketing are common:
(a) Surrogate Advertising, and
(b) Social Marketing

In case of cigarette Advertising, most of it is done at the point of sale itself, since other media vehicles have been banned. As long as the packets contain the 'warning', advertisers use the point of sale to their advantage to differentiate their products.

Examples of surrogate advertising include:

• ITC-GTD’s (greeting cards division) Expression Greeting Cards

• Red & White Bravery Awards

• Wills Fasion Shows 

Distribution

Cigarette distribution in India is primarily through the local Paan shops (panwaadi ki dukaan).

The distribution of cigarettes follows the following model:

Factories in India include:

ITC:

• Bangalore
• Kolkata
• Munger (Bihar)
• Saharanpur

Godrey Phillips:

• Ghaziabad
• Andheri (Mumbai)
• Baramati

Distribution:

• Distributors handle volumes of 5-6 crores/month.
• An Assistant Manager along with 1-2 Sales Assistants on the payroll of ITC is present.
• Sales teams are paid and managed by the distributors
• All transactions are cash and carry

Dealers:

• Dealers deal in tobacco products and not just cigarettes.
• They drive large volumes of sales.
• Inject credit into the system.
• Have their own storage
• Supply to other retailers and paan shops
• Often buy large amounts on speculations

Small retailers sell 15-20 packs a day and make margins of 10-20 Rs/packet and procure cigarettes on a daily basis from the dealers.

Large retailers get their goods directly from company distributors.

Since 2008, the taxes have gone up by almost 5 Rs/cigarette.

Product pricing

Pricing a cigarette rarely follows the normal characteristics of FMCG products.
Cigarette prices almost always increase due to increase in tax on tobacco products in the annual Budget of the Government of India.



Pricing generally has the following steps involved:
1. Selecting the price objective
2. Determining the demand
3. Estimating Costs
4. Analyzing competition
5. Selecting a pricing method

ITC follows the following pricing mechanism:

1. FOB origin – The shipping cost from the factory or warehouse is paid by the purchaser. 
2. Uniform delivery pricing – The same price is charged to all 
3. Zone pricing – Price increase as shipping distance increase 
4. Basing point pricing – Certain cities are designated as basing points. All goods shipped from a given basis point are charged the same amount. 
5. Freight – absorption pricing – The seller absorbs all or part of the cost of transportation. This amounts to a price discount, and is used as a promotional tactic.

Price elasticity:
Depending on the size of the price increase, reduced consumption of tobacco products following increases in tobacco taxes can be quite substantial. In 1999, a World Bank review concluded that, all else being equal, price rises of about 10% would on average reduce tobacco consumption by about 4% in developed countries and about 8% in developing countries. In their 2003 meta-analysis reviewing 86 studies published to the year 2001 which examined the price elasticity of demand for tobacco products, Gallet and List (link) found a mean price elasticity of –0.48, meaning that, on average, a 10% increase in price will be followed by a decrease in consumption of 4.8%.

More than a decade later, the Policy Economics Group at KPMG Peat Marwick conducted a new analysis of the price elasticity of cigarette demand on behalf of Philip Morris(link). This study applied methods used in previously published studies of cigarette demand to updated data on cigarette sales, explored how elasticity had changed over time, and provided estimates from models applying an economic model of addictive behaviour(link) to cigarette demand. Based on their time series data, the authors estimated an overall elasticity of −0.60 for the period from 1947 through 1987. They noted that elasticity has changed dramatically over time: “The elasticity fell during the period from 1947 to 1957, then increased during the period from 1957 to 1987.” They went on to state: “The reasons for the current increasing trend are unclear, but the statistics indicate that the increases in recent years have been significant.” As with the econometric studies discussed above, the authors found that the long run price elasticity of demand after accounting for addiction is higher than that obtained when addiction is ignored.

The profit margins of free enterprise cigarette manufacturing is around 30% of net sales before taxes and for monopoly type organizations, 40% free of taxes. (link)

Even though cigarettes pursue a value pricing model, cigarettes are purchased primarily because of their addictive nature. Thus, cigarettes have a huge product value in terms of providing immediate satisfaction to the smoker. No amount of psychological, energy or monetary cost deter habitual smokers.

The only difference found in cigarette prices is perhaps due to the cost of import of cigarettes manufactured abroad. 

One would expect different types of cigarettes to command different prices, however, they are usually priced very similarly because loss of revenue due to the price premium is not worth it to the retailers.

Another example of how pricing with respect to products works is how excise duty on a 64mm cigarette is Rs.0.67 against Rs.1.47 on a 69mm stick, according to data from the Central Board of Excise and Customs.
Thus, shortening the length of the cigarette from 69mm to 64mm. ITC’s move to shorten low priced cigarettes by 5 millimetres (mm) helped fourth quarter profit jump 18% as customers snapped up smokes small enough to qualify for a lower government tax rate.

Setting product strategy III

Businesses are continuously making critical decisions about their product range. Product decisions will include whether to develop new products and how to manage existing products. This article is about the different ways firms manage the type and number of products they sell and related terms.

Product Mix
The Product mix is the total variety of products a firm sells. Some firms will sell just one product, whilst others will sell a large number of different products. For example ITC's product mix includes primarily cigarettes. Firms should select their product mix carefully as they will need to generate a profit from each of the products in the product mix.

Product Line
Firms may decide to split their product mix into groups known as product lines. A product line is a number of products grouped together based on similar characteristics. The characteristic used to split products, will depend on the firm and its product strategy. They include product price, product quality, who the product is aimed at (target group), and product specification/features. For example ITC's cigarettes are divided into product lines based on the following features; size, flavor and strength. Product lines help firms manage their products as product strategy can be designed around product lines. This is useful if the firm has a large product mix as there is less need to concentrate on individual product type strategy.

Product Line Length
The product line length shows the number of different products in a product line. A long product line has lots of different products in it and a short product line has a small number of different products. The product manager's job is to work out how many products to include in the product line. If there are too many product types in a product line, they will begin to compete with each other, increase costs unnecessarily and even confuse customers. If the product line is too short it will limit customer choice and send customers to competitors with a greater selection of products.

Product Line Depth
Some of the product types in a product line may be split again into groups, the product line depth shows how many subgroups the product line contains. For example ITC introduced the Classic Menthol when they realized that people who purchase cigarettes but are reluctant to buy them because of bad breath or people who have throat problems (not cancer!). Each of these product lines can be further split into subgroups such as Goldflake Mini.

Product Line Stretching
Product line stretching occurs when a business adds new product to the product line and the new product types are of a higher or lower quality than existing products in the product line. If the new product types are cheaper or of a lower quality it is known as a downward stretch. If the new product types are more expensive or of a higher quality it is known as an upward stretch. Supermarkets often stretch product lines by offering value, standard and premium versions of their own brand products. Product stretching enables firms to fill any Gaps they have identified in the market.

Product Mix Width
The product mix width is the number of product lines in the product mix. A wide product mix increases the type of customers a firm can target. However it may involve a lot of work as each product line will require a strategy and management. It could also reduce specialisation as it is difficult to offer every variant of a product type if you are selling lots of different types of product. A narrow product mix may be easier to manage and allow the firm to specialise in particular product lines and product types. However a small product mix reduces the type of customers a firm can target as they can't cater for everyone's product "needs and wants".

Conclusion
Product selection is an important decision as the product is the item you are selling. Firms need to strike a balance between giving customers choice and trying to cater for everybody by stocking too many products. Dividing products into product lines and the product line into further groups, helps firms to develop product strategies. It will also help them identify which product ranges sell well and which do not as each product line will be monitored.

Setting product strategy II

Each product is related to certain other products. The product hierarchy stretches from basic needs to particular items that satisfy those needs. We can identify six levels of the product hierarchy and align them to our product i.e. Classic Milds:

• Need family: What is the basic need being fulfilled? E.g. Relaxation
• Product family: The umbrella term that encompasses product classes that have the potential to satisfy that need. E.g. Tobacco products
• Product class: A group of products that are homogeneous or generally considered as substitutes for each other. The class is considered as narrow or broad depending on how substitutable the various products are. E.g. Cigarettes
• Product line: A group of products marketed by an organization to one general market. The products have some characteristics, customers, and/or uses in common, and may also share technologies, distribution channels, prices, services, etc. There can be product lines within product lines. E.g. Wills Classic
• Product type: A grouping of similar kinds of manufactured goods or services. A product type might be used by the marketing team of a business to structure its overall marketing strategy and direct it toward optimally interested consumers. E.g. Wills Classic Milds
• Item: The specific product which fulfills the need. E.g. A box of Will Classic Milds Special Edition

Product Mix is used to highlight the various product types which are catered to by a company.

In this case, the company is the corporation that produces Classic Milds, i.e. ITC Limited
Width: How many different types of tobacco products are manufactured by ITC Limited? Cigarettes
Depth: Under each cigarette type, what are the various other lines? Depth refers to the collection of all the lines offered by the company under each category
Lines: Under each cigarette type, what are the various sources of revenue for the company? Wills Classic, Goldflake, India Kings, Navy Cut

Setting product strategy

Defining a product is indeed a Herculean task. What separates one product from the next? That too in comparison to the products offered by the same company (perhaps even within the same product line!) versus those offered by the competition. It is up to the marketers to project the characteristics of each product as distinctly as possible so that they might be able to persuade the customer to pick their product from a sea of products available.
Cigarettes are subject to this conundrum as well. Perhaps even more so than the others since people simply light up a cigarette from another brand when they have the urge to smoke in the absence of their preferred brand. Thus it is very important for a cigarette brand, like Classic Milds, to be perceived as being different. Otherwise, it will simply become a competition in terms of who has a better distribution network.

 While applying the customer-value hierarchy, the following come to mind:
- Core benefit: A cigarette offers relief and satisfaction to the smoker. The smoker awaits the next puff as much as he or she enjoyed the previous one.
- Basic product: A basic product would require the tobacco that is to be smoked to be rolled into a smokeable object. In the most basic form, tobacco rolled up into smoking leaves would be a basic product. Thus, a beedi would be a basic product.
- Expected product: An expected product would be qualities or attributes that the customer has come to expect. A cigarette being rolled in premium smoking paper as opposed to beedi leaves and having a smoking filter would become an expected product.
- Augmented product: A product that exceeds customer expectations. Special commemorative packs such as the following one would be an example of augmented product:

- Potential product: A potential product would be a product that has all the features of the previously mentioned products along with any innovations that might offer something radical to the customer. An example would be a Milds pack that also has a match box inside it.

The different product levels can be understood in context with the 3C's model.
The different product levels target different customers. For example a beedi would target a different class of customers than a cigarette would. This in-turn would be different from the class of customers that a cigar brand would target perhaps. Competition would depend entirely on what type of product is being sold. The competition in the beedi segment would be different from the competition in the cigarette segment. Thus, corporations that create different products have a certain customer class in mind when marketing a product and this in-turn would create competition accordingly.
Therefore, a Ganesh beedi (from Ganesh Bidi exporters) would compete with a 502 Pataaka beedi (from Pataka Industries), a where as a Classic Milds (from ITC) would compete with a Goldflake (from ITC) or a Marlboro Milds (from Philips Marlboro Industries).

Life Cycle Concepts

Life cycle refers to the chain of events that comprise of a beginning, maturing and demise of an entity that follows such a pattern.

Life cycle concepts can be applied to various levels of organizations.
Thus we have:

• Product life cycle: The period of time over which an item is developed, brought to market and eventually removed from the market. First, the idea for a product undergoes research and development. If the idea is determined to be feasible and potentially profitable, the product will be produced, marketed and rolled out. Assuming the product becomes successful, its production will grow until the product becomes widely available. Eventually, demand for the product will decline and it will become obsolete.
• Brand life cycle: The possible change in associations that a brand has to an array of different products over time. It results from diversification or migrating to a new area of specialization altogether.
• Industry life cycle: A concept relating to the different stages an industry will go through, from the first product entry to its eventual decline.

We shall focus on product life cycle (PLC). PLC generally comprises of the following distinct stages:

• Introduction
• Growth
• Maturity
• Decline

The following chart represents the revenue vs time relationship with the four stages clearly demarcated:

Cigarettes do not follow the normal product life cycle curve. 

Theoretically speaking, cigarettes are addictive in nature and thus there should be no no question of the decline of cigarettes. Unless cigarettes are heavily taxed and cigarette consumption is heavily penalized, cigarette consumption will continue to grow. However global consumption of cigarettes has declined with the anti-smoking programmes across the world and the vilification of cigarettes and smoking across the world. The CAGR for cigarette consumption across the world has show signs of slowing down. 

The world has literally gone from:

 

to 

The cigarette industry on the other hand follows an S-curve. The cumulative consumption of cigarettes shows no signs of receding. People who smoke a particular brand usually stick to that brand till either they quit for good or they die.

Competition and Industry

As a business operates and becomes profitable, there is space for other businesses to come and make money from the same idea. Thus all businesses naturally have competition, unless competition is made impossible artificially or artificially stifled.

Competition is defined as the rivalry among sellers trying to achieve such goals as increasing profits, market share, and sales volume by varying the elements of the marketing mix: price, product, distribution, and promotion. It is the product of vying for customers by the pursuit of differential advantage, i.e., changing to better meet consumer wants and needs.

Thus an industry is the sum of all competitors within the same category of products.

As industries mature over time, they develop certain norms and practices which are more or less common within them.

The Indian cigarette space is dominated primarily by three players:

• ITC Ltd
• Godfrey Phillips India Ltd
• VST Industries

Output per annum: Indian Tobacco and tobacco products earn a whopping annual sum of about Rs.10271 crores

Percentage in world market: India today holds a meager 0.7% share of the US$ 30 bn global trade in tobacco, with cigarettes contributing for 85% of the country's total tobacco exports.
Market Capitalization: Indian Tobacco Industry's exports are likely to touch Rs. 16,050 million towards the end of current fiscal

The Indian cigarette industry has been posting strong growth in the recent years, but is forecast to slow down

in coming years, primarily due to the strict regulations put in place by the Indian government to curb the

usage of tobacco and tobacco products.

While cigarettes are usually the leading segment in most countries, the Indian tobacco industry is led by the

sale of chewing tobacco followed by cigarettes.

The Indian cigarette industry follows the international phenomenon of the industry size remaining the same even during economic downturns since smokers tend to purchase cheaper brands and thus the sale of cigarettes remains the same.