While cutting prices isn't new, the growing number of cuts and marketers' increasing tendency to take the news directly to consumers have the makings of a trend.
As such, price reductions are serving as a third category of marketing spending, added to media advertising and promotion.
Also, the growing use of price cuts could siphon money from budgets slated for the other marketing disciplines.
Kraft General Foods' 20% price reduction for Post cereals last month was the latest in a series of recent package-goods price cuts. They have included a similarly steep 20% reduction in price of Purex detergents by Dial Corp. and cuts in tissue, paper towel, coffee and disposable diapers prices by Procter & Gamble Co.
In Kraft's case, the company said marketing spending would be cut an unspecified amount to fuel the price reductions.
Price cuts don't necessarily trim marketing budgets, but they undoubtedly serve as an alternative to other kinds of spending, said Jeffrey Hill, managing director, Meridian Consulting Group.
"Procter & Gamble or Post ... could just as easily have taken the price reductions and spent them back into the business in the form of incremental advertising," Mr. Hill said. "They made a very considered choice not to do that."
When price cuts reflect reductions in raw material or operating costs-as with P&G in paper and coffee and Dial with Purex-they don't have to mean cuts in ad spending, Mr. Hill said. But for competitors forced to follow suit without similar savings, he said, "It clearly means a reduction."
Recent price cuts also increase pressure for marketers to follow P&G's lead in seeking more cost-efficient and targeted advertising and promotion channels, said Burt Flickinger, consultant with Price Waterhouse & Co.
Price cuts, as opposed to increased media spending, could become an increasingly popular use for savings from trimming inefficient couponing and trade deals, said Ken Harris, partner, Cannondale Associates.
The most interesting aspect of recent price cuts was how they were announced, Mr. Harris said.
P&G, Kraft and Dial "went directly to the media first, which is breaking the paradigm in which you usually do any kind of pricing action by talking to the retailer first and it may never actually make it out to the consumer other than what they see on the shelf," he said.
Kraft garnered by far the most free media for its Post cut, with reports on network TV newscasts, Page One coverage in newspapers in Atlanta, Chicago and Cincinnati and a section front story in USA Today.
The Post price reduction generated more than 210 million impressions during its first week, according to Burson-Marsteller research for Post.
Sales reps were meeting with retailers as Post announced the cuts to the media, said Tim Callahan, VP-marketing strategy, an approach he said created strong trade support and a local advertising bonus.
"We're already seeing some feature ads by our [retail] customers that .*.*. they're passing that reduction on," Mr. Callahan said.
APPROVAL FROM SCHUMER
Post also got a televised endorsement from Rep. Charles Schumer (D., N.Y.), a long-time critic of cereal pricing, who asked consumers to buy Post cereals to support the price cut.
Two other categories that have caught Rep. Schumer's attention -bread and canned soup-could be among the next categories for price cutting strategies, Mr. Harris said, adding that those with the strongest private-label presence are the most likely candidates.
"I think you'll see more price decreases coming, and when they do there's going to be a lot more fanfare," he added.
Previously, most package-goods marketers steered clear of such high-profile announcements. For instance, an 11% price cut in cereal prices last year by General Mills got less of a public relations push and was styled more as a shift of funds from couponing to lower prices, Mr. Harris said.
Making the most of price cuts, however, means getting the word out to consumers, said Gary Stibel, principal with New England Consulting Group. And that should mean price cuts generate increases, not decreases, in marketing support, he said.
Ideally, a price reduction should be linked with a product enhancement on which marketers can focus a marketing campaign, Mr. Stibel said, as when Dial added a color-protectant to Purex along with lowering the price.
Despite growing numbers of price cuts, analysts see little risk yet of a damaging deflationary spiral for package goods.
Price Waterhouse economists have found price declines of 1.1% to 1.5% in package goods during the past two years and projected earlier this year the rate could grow up to 2% in 1996, Mr. Flickinger said.