Table 2

Description of pricing strategies

Pricing strategyDescription
Differential shifting of taxesTaxes on tobacco products may be shifted to different extents:
  • Overshifting takes place when the TI increases the price of products above that required by the tax increase. The burden of the tax increase (and more) falls entirely on the consumers rather than the producers.

  • Undershifting occurs when the industry absorbs (to some extent) tax increases, thus delaying/preventing the intended tobacco price rises. In this scenario, the cost of the tax increase is at least partially borne by the producers.

Introducing new brands/segments/productsThe industry introduces new and cheaper factory made (FM) and roll-your-own products (RYO), including cheaper variants of existing products and potentially new price segments, to increase the opportunities for smokers to down-trade instead of quitting. This strategy helps retain customers who no longer want, or are unable, to pay for higher priced products. Simultaneously, they retain higher priced offerings that allow the industry to profit from those who are willing to pay higher prices for ‘luxury’ brands/products.
Price discrimination and price related promotionsSelling the same product at different prices to different customers, often through targeted price-related promotions, can preserve affordability of products across all income groups following a tax increase. This helps to prevent price-sensitive users from quitting or reducing consumption, ensures potential new customers are not deterred by high prices, but allows the industry to take advantage of those less sensitive to price.
Price smoothingThe industry prevents any sudden jumps/increases in price the consumer would face following tax rises by smoothing that increase throughout the year by employing smaller, more frequent increase in prices. This minimises the public health impact of tax increases by ensuring that smokers never face a sudden, large, potentially quit inducing price increase.
ShrinkflationVarying the numbers of cigarettes per pack. The industry reduces the number of sticks in a pack from (for example) 20 to 19, 18 or even 17 sticks, or weight of tobacco per pack, to disguise price rises and prevent purchase costs of a packet of tobacco being tipped over certain psychological levels. The higher cost per cigarette does not become immediately obvious to most smokers.
Changing product attributes or production processesComplex tobacco tax structures that levy different tax rates based on different characteristics (eg, length, weight, price, or product type) mean the tobacco industry can exploit different tax classifications by changing physical product attributes or production methods to achieve classifications with lower tax rates.
  • TI, tobacco industry.