New product pricing strategy
Before the mid-October launch of Maruti Suzuki's new Alto 800, the company set itself a target
unprecedented in the history of the Indian automobile industry. Maruti called it the "50/20/10
target". It meant aiming for 20,000 orders, and 10,000 deliveries - all within the first 10 days.
To make it harder to achieve, the car market was slipping
backwards in Autumn 2012 as the Indian economy grappled
with 10% inflation and high interest rates. With such high
inflation, it would have been understandable if Maruti had
priced their new Alto model 10% higher than the previous
one. Instead it made headlines by launching at 2% below –
even though the specification had been upgraded. Prices for
the Alto started at £2,500, with £3,400 for the highest spec.
The new Maruti Alto 800
On the morning of the tenth day, Maruti Suzuki's Managing Executive Officer for marketing and
sales announced: "We crossed all three targets. We launched in 821 cities and 1,130 outlets." That
morning, the new Alto had crossed 27,000 bookings and 10,200 deliveries.
Getting the pricing right was critical because Maruti, for so long the dominant force in India with a
45% market share, had lost 3 percentage points in the previous year. This was partly because the
Alto model, which had once sold 35,000 cars a month, had seen its sales slip to 18,000 by early
2012. And with small cars such as this taking 70% of the Indian car market, the Alto launch was
vital.
Market for new cars: India v UK
Million cars
Annual sales; sources: OICA & ICCT
3
2.5
2
1.5
1
0.5
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
When asked whether this pricing might spark a price war, Maruti suggested that it was simply
making use of its competitive advantage. An independent auto analyst confirmed that "Maruti
enjoys huge economies of scale, even at lower margins. No other company can do that."
The reduced price is intensifying competition in the market in what Abdul Majeed, Partner at PWC,
calls the "volume game". He explains that Maruti's pricing may initially spark a price war, but it is
important to develop the market three or four years down the line, as it would generate high
volumes. "If you can't sell 200,000 to 300,000 cars, you can't make money," he says. In the short
term, margins will feel the pinch, but in the long run the move will be beneficial, as small cars still
make up 70 per cent of the Indian car market. "Car makers will have to take the risk," says Majeed.
A year on, in September 2013, the Alto was India’s top-selling car and Maruti’s market share had
recovered from 41% to 43.5% since the same month in 2012.
Questions (24 marks; 30 minutes)
1. Explain how market trends in new car sales in India (see graph) might have influenced the
pricing decision for the new Alto 800. (4)
2. Assess the possible implications for the Indian car market if Maruti’s pricing does ‘spark a price
war’. (10)
3. Assess whether Maruti was wise to adopt a penetration pricing strategy for its new Alto model.
(10)
Marking Guidance
1. Explain how market trends in new car sales in India (see graph) might have influenced the
pricing decision for the new Alto 800. (4)


Between 2001 and 2012 car sales have more than tripled in India, which represents a very
healthy upward trend; this may reassure Maruti that it is worth some short-term sacrifice on
profit margins in order to retain a strong market share position
Between 2012 and 2013 the market slipped back, though only to a point that was still 3
times that of the 2001 sales (note that in Britain the 2013 figures are up on 2012, but still
below 2001); given the short-term pressure on the market, a lower pricing point may have
been sensible
2. Assess the possible implications for the Indian car market if Maruti’s pricing does ‘spark
a price war’. (10)





The ‘car market’ could be said to consist of three groupings: customers, producers and
retailers
For the consumer, a price war comes as a blessing; if one imagines car producers pushing
their prices down in order to win market share, car buyers in India could end up affording a
better car than they ever expected, and in other cases people may realise they can afford a
car when they had previously ruled out the possibility
For producers a price war is the worst possible news; it usually means a dramatic squeeze
on profit margins, yet there are few market share winners because the price cuts are
cancelling each other out
For retailers a price war can be a way of stirring up some consumer interest, so retail sales
should improve; if the retailers are strong enough they may be able to negotiate to keep
retailer profit margins at the same level as before the price war
Overall, the consumer wins in the short-term but possibly at the cost of pushing a weaker
producer out of business, allowing the remaining firms to push their prices higher than ever
due to the reduction in competition
3. Assess whether Maruti was wise to adopt a penetration pricing strategy for its new Alto
model. (10)




Yes it was wise because – a year on – Maruti had regained market share and had
revitalised sales of its top-selling brand; who wouldn’t want to achieve that? This, of
course, is making use of the benefit of hindsight, but it would be unwise to ignore the data
available to answer the question
It was also wise because being the top-selling brand (and company) is not only about
revenue, but also has an impact on costs – what the text refers to as the ‘volume game’ in
which sales of 200-300,000 a year are needed to make a profit; Volume, of course, gives
rise to economies of scale, which are especially important in the car business
But isn’t it too early to draw conclusions? Yes, it’s looking clever one year on, but that
might be far too short a timescale; the risk with penetration pricing can be that it’s
impossible to push prices back up once consumers have got used to lower ones, i.e. they
may value the Alto rather less because it costs rather less
Although the latter critique of penetration pricing is fair in general, it perhaps lacks
substance in this case; for Maruti, with falling market share in a falling market, it was both
obvious and essential to relaunch the Alto with a highly competitive price; in this case,
penetration was the right strategy