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Lessons Learned From Vodka:

This blog will attempt to pass along historical views, along with a sometimes impious perspective on marketing tools like UMRP, distribution or relationships. No single answer works for every question, and any activity can be dead wrong under certain circumstances. For example:

* Selling more dealers might result in lower sales volume
* Raising prices could increase sales
* Simplification may undermine success stemming from complexity

Example 1 comes from the 1960’s — Smirnoff Embraces Price Chic

Years ago a popular college case study in marketing had to do with vodka. Use of vodka itself was also somewhat popular in college. Designer drugs had not yet been developed, so brown liquids (Scotch, beer, bourbon) dominated intoxication. Vodka was faintly alien, like wine, kind of European and not particularly manly. It would take the end of the three-martini lunch era, 15 years later, for breath-friendly vodka to hit its stride.

In the era preceding power import products like Stolichnaya, Absolut and Grey Goose, two labels dominated the vodka market — Smirnoff and Wolfschmidt. Liquor store customers decided whether to buy 80-, 90- or 100-proof vodka, but generally chose one of these two brands, or cheap house varieties like Piggly Wiggly vodka.

Deciding to break a market share deadlock, Wolfschmidt moved aggressively. After careful consultation with cost accountants, consumer demand charts and entrails secured at a northwest New Jersey sheep farm, they dropped their price to $12/case ($1/bottle.) Sales skyrocketed. Wolfschmidt VPs got new washroom keys, Hugh Downs interviewed them on The Today Show and they all would have high-fived except that hadn’t been invented yet. Smirnoff executives pondered how to react. About one month later they moved — and in a strange direction.

While capable of parity manufacturing costs — potatoes being potatoes after all — Smirnoff might have worked a little closer to the bone and undercut Wolfschmidt pricing. However, since neither computers nor calculators existed — and sales executives felt using a slide rule was simply too geeky — this seemed fiscally dangerous. Other ideas bubbled to the surface, perhaps increased advertising, or threatening liquor store buyers with release of last year’s cruise photos. In they end, Smirnoff eschewed a price war and RAISED their prices $1 a bottle. It worked.

Customers who had little knowledge in this liquor category now had a clear choice between average vodka and premium vodka. Since they bought approximately one bottle annually — in case Vladimir the exchange student decided to drop by for a drink — the $2 premium represented no financial hardship. Smirnoff became the No. 1 brand and remained there for many years (until Absolut passed them). Wolfschmidt never fully recovered. As a “tweener” value brand they languished in a category where consumer chic became increasingly important, hence the growth for import brands. Bang-for-the-buck shoppers used Kresge’s house vodka for their punch needs. Wolfschmidt had no customer base.

Smirnoff avoided loss by not engaging in price competition. They profited by forgetting the price elasticity charts, understanding that product cost represents simply another component in the marketing matrix.

Posted by Warren Mann on December 19, 2006