Gillette: Cutting Prices to Regain Share

Abstract

After losing market share to low-priced competitors such as Harry’s and Dollar Shave Club for several years, Gillette decided to fight back by launching new products and increasing advertising. When these efforts failed to stem the losses, Gillette decided to cut the prices on its razors and blades in April 2017. Bonnie Herzog, an equity analyst at Wells Fargo, must assess how the recently announced price cuts are likely to affect Gillette’s earnings and its parent company’s earnings (Procter & Gamble owns Gillette). As part of her analysis, Herzog must estimate the price elasticity of demand for Gillette’s razors and blades. The case contains scanner data which allows students to calculate both price elasticities for a sample of Gillette products, and sufficient data to estimate the financial impact.

This case explores the economic impact of a dramatic price cut and the wisdom of starting a price war with significantly smaller rivals offering lower-priced products. It was designed to teach students how to estimate price elasticities of demand, to draw inferences based on those estimates (i.e., how the price cut will affect profitability), and to critique the estimation process (i.e., what is being assumed, what might affect the validity of the estimates, etc.). The case also allows for a more open discussion of price wars and competitive dynamics in markets characterized by a large incumbent and small, low-priced entrants with new business models (e.g., subscription services).

Keywords: Price War, Price Elasticity of Demand, Consumer Goods, Market Share, Pricing, Equity Analyst, Earnings per Share, Razors, Shaving, Investing, Brand Power, Marketing Strategy, Vertical Differentiation

JEL Classification: D22, D4, L1