Procter & Gamble Trumps Church & Dwight: An Example of the Customer Orientation Overtaking a Medieval Business Strategy

CEOs Robert McDonald of P&G (PG) and James Craigie of Church & Dwight (CHD) are facing off in the laundry soap business, and one of them is slinging mud.  Recent executive comments and division performance reports highlight that the battle in the soap aisle isn’t just about soap, it’s about the fundamental purpose of businesses in competitive markets.

Procter & Gamble’s Tide Pods hit the $6.5 billion laundry detergent market in February 2012.  Their road to release was lauded as the result of major improvements in product development processes.  For their first full year of release, P&G’ McDonald targeted $500 million of revenue.  According to most reports, P&G will hit this revenue target.  In a market where 95% of new products fail, most would call this an overwhelming success.

Most, but not all.

Chruch & Dwight’s Craigie has derided the shift to podded laundry detergent.  In stating, “Pod is killing the laundry detergent category”, he isn’t just referring to his Arm & Hammer or Xtra detergent brands, he really does mean the entire category has been harmed by P&G’s new product.  Overall, market research firm Nielsen reports U.S. sales of laundry detergent have declined 2.1% in the 12 months till March.

But how can a successful new product harm a product category?

Medieval Business Strategy

On a per-load basis, podded detergents are more expensive than jugged detergents.  Recent reports on Tide sold at Walmart (WMT) indicate that Tide Pods cost 25 cents per load while Liquid Tide cost 20 cents per load.

In most situations, higher cost per use case would imply that the new product would increase category revenue, not decrease it.  Yet podded detergent counter-intuitively saves most consumers money on laundry detergent overall.

Why? Because most consumers over-pour liquid detergent when doing laundry while the detergent pods pre-measure the required dosing and therefore reduce the tendency to over-use detergent.  By improving the ability of consumers to use the right dose of detergent per load, pods reduce the overall quantity of detergent they purchase.  This reduction in consumption not only saves consumers, it also keeps clothes lasting longer and reduces water pollution (that is, it is greener on some counts).

Even after accounting for higher prices, the reductions in consumption associated with podded detergent has reduce total household spending on laundry detergent.  On this count, Craigie is right, pods are reducing category spending levels.

Past product innovations, such as higher concentrations of liquid detergent, have routinely led to increases in category sales, not decreases.  In keeping with this trajectory, one would expect current and future product innovations to continue to grow category sales, not decrease them.  Thus, pods are an anathema to Craigie’s thinking.

But in his broad-strokes analysis, Craigie is wrong.

Customer Orientation

Neither an industry nor a business exists only to extract profits from unsuspecting customers.  They exist to serve customer needs … profitably.

P&G’s Tide Pods serve those customer needs as witnessed by the strong growth of the products’ sales in a highly mature market.  Moreover, it does it profitably.  By focusing on the challenges consumers have with detergent and the root causes of past product failures within this market, P&G successfully developed and marketed a product which both improved the customer experience and improved P&G’s profitability.

This is the essence of the modern customer orientation:  to serve customer needs profitably.

In contrast, Craigie seems to take a medieval viewpoint of business strategy, where the business exists to make producers and the industry rich.  Similar to medieval royalty running their kingdoms and fiefdoms for their own wealth, these blindered business leaders run their business for their own wealth (and their stockholders’).  This strategy works when the people have little choice in what or where to buy.  But we don’t live in medieval times.

We live in competitive markets where customers have choices.  Since all profits ultimately come from customers, business strategy must focus on serving those customers profitably, not finding ways to bilk them out of money for products they didn’t really need.

Hence, we come to the divergence in thinking.  Craigie’s comments reveal a belief that business should seek to sell products that customers don’t really need simply to increase revenues and profits.  McDonald’s actions reveal a belief that businesses should sell products customers want at a price greater than costs with confidence that profits will follow.  Craigie’s comments reveal a desire for industry planning.  P&G’s actions reveal an active participation in creative destruction, a key philosophical reason to support free market capitalism.  Of these two belief systems, I know which I would prefer to purchase under, and strongly suspect I know which is more likely to succeed in today’s competitive markets.

Craigie, wake up.