Why pricing power is a brand’s greatest asset

A brand’s greatest strength is how well it justifies its price point – so it can grow sales without resorting to discounting.
15 September 2020
Man tying Nike shoes
Nigel Hollis
Nigel
Hollis

Chief Global Analyst, Kantar

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The changing definition of a strong brand

When I first started full-time work for the Foods Division of Cadbury Schweppes some decades ago there was no argument about the benefits of a strong brand. Faced with a wide array of cheap store brands we knew that the only way for our brands to grow market share and make more money was if people believed it was worth paying more for them. But over the years, the belief that a strong brand helps justify that brand’s price seems to have become dominated by the belief that the role of a strong brand is only to drive more sales. Price, it seems, has become a demand factor considered independent of the power of the brand.

People still pay more for stronger brands

Things have changed over the years, but do you really think the benefits of a strong brand have changed in the light of easy search, Amazon, price comparison websites and hard discounters? If so, think again. Even in a world obsessed with getting a good deal, in most product and service categories the majority of people state it is more important to choose the right brand than get the best price. And they act on that belief. The anecdotal evidence to support this assertion is easy to find and here are just three examples.

  1. Let’s start with the most obvious example and compare the iPhone 11 Pro to the One Plus 7T Pro. The OnePlus has more storage, more RAM and a bigger screen size and the same rating from users but sells for 40% less. You would think that the “rational” phone buyer would choose the OnePlus and save some money, but the iPhone dominates in most countries where they come head to head.
  2. Or, compare the price of a litre of Coca-Cola to the price of a store brand. In the US, 2 litres of Coca-Cola costs about a $1.80 at Walmart but 2 litres of Sam’s Cola is less than a dollar. Is Coca-Cola’s secret recipe really worth a dollar more? Many people still think so.
  3. Jumping to the UK, Direct Line Group’s Churchill and Privilege brands compete in the highly competitive UK insurance market, one of the few categories where more people claim to choose on price than brand. As documented in an IPA Award Paper (paywall), when people use a price comparison website more people end up choosing Churchill even when the price ranking is the same as Privilege. The difference is that Churchill has had twenty times more above the line advertising investment than Privilege and people are drawn to the more familiar brand. It is a safer, more trusted choice.

Factors that help a brand justify its price point

It is important to recognise that pricing power is driven by both structural advantages, like patents, business model or control of retail availability, as well as brand equity. Luxury brands have famously commanded high prices in part through the exclusivity created by limited distribution. Today Nike is seeking to build that advantage by limiting purchase to their own outlets or curated vendors. On the other side, IKEA’s business model includes designing its products to meet a specific price point and then benefiting from increased volume sales rather than higher prices. But structural advantages are not enough on their own – Nike and IKEA both invest heavily in their brands to guide people’s choices and justify their price point.

People will pay more for a brand they perceive as meaningfully different

Looking beyond the anecdotal evidence, let us examine the results of a study that integrated Kantar’s brand equity data with behavioural purchase data. The study was conducted in New Zealand by interviewing 810 members of the Flybuys panel about their attitudes to the yoghurt and cat food categories, and the brands within them. The results are compelling – and not just because on average people were more willing to spend money on cat food brands than yoghurt, suggesting they cared more about the pets in the household than the humans.

The data clearly showed that if people stated they would choose a brand first and then look for the best price, on average their behaviour was aligned with that attitude and vice versa. People who claimed to be brand-driven paid more for brands than those who claimed to choose based on price first. The brand-driven paid 11% more for the average brand. Further, when a brand was perceived to be meaningfully different from the competition the brand-driven paid 38% more than they did for brands they did not see as meaningfully different. Even those shoppers claiming to be price-driven paid a premium for brands they perceived as meaningfully different, 14% more.

Which matters most? Meaning or difference?

The ability to command a price premium is all about what associations come to mind when people recognise the brand. It is important to distinguish between mental associations that drive desirability and those that help justify the brand’s price. In Kantar’s brand equity framework, a brand is considered meaningful when people say that it meets their needs and they like it. Meeting needs is table stakes; affinity is more variable and has a proven influence on repeat purchase. Being perceived as meaningful is necessary but does not in itself justifying people paying more for a brand.

To justify paying a more for a brand people must feel that they are getting something from buying that brand that they cannot get elsewhere. In other words, they have to perceive it as different in some way. Kantar’s definition of difference is that the brand is either perceived to be setting the trends for its category or that it is seen to be unique. Brands that command a higher price point in their category are typically seen as meaningful and different. They are different in a good way. Perceived differentiation allows people to say, ‘It’s worth paying more for this brand because it gives me something I cannot get elsewhere’. If the brand is not seen to be different from the competition, then it is commoditised.

Brands must justify their price point for sustainable growth

There will always be a trade-off between volume and price, but ensuring that your brand can justify its price point is critical to safeguarding the brand’s future profit stream. Remember, the profit accruing from a 1% increase in price is far greater than that coming from a 1% increase in volume.

The problem is that simply lowering price to drive more volume is not a sustainable growth strategy. When a brand discounts it makes less margin, and if people start to expect to buy the brand at a lower price, it is difficult to go back. Witness the periodic announcement from major packaged goods manufacturers that they are going to rely less on price promotion only to find themselves spending the same amount on promotions a few months later. When excessive discounting squeezes margins too much it is the innovation and marketing budgets that suffer. Less innovation and marketing mean that brands fall behind the competition, not as many people buy them, so they have to discount more. The end result is that brands enter a death spiral of weaker and weaker margins. The COVID-19 pandemic has simply hastened the end of many companies that found themselves trapped in this downward spiral.

Alas, discounts do not just impact the margins made on current sales, they habituate existing buyers to expect lower prices in future and they are signals which potential buyers interpret both positively and negatively. Some potential buyers will welcome the lower price, likely because they do not care much about the category or do not believe there is much difference between the brands in it. However, price is also a signal of quality that people intuitively “validate” against the available cues and their own experience. The risk is that if people perceive a brand discounting more than they might expect, they may infer that there is something wrong with it, perhaps that it is poor quality or not as popular as it used to be.

Build your brand’s penetration at the right price

Brands must influence and acquire incremental users if they are to grow. However, too many brands jeopardise their future profits by using price as a lever to drive new demand, apparently believing that it is independent of how people perceive the brand. It is not. A well-differentiated brand, be it is terms of product, purpose or positioning, will always command a higher price point than an undifferentiated brand. When brands fail to create meaningful differentiation, they undermine the brand’s ability to command its price point and open the door to excessive discounting in order to sustain volume sales. When this happens, it is all too easy for the brand to slip into the death spiral of lower and lower margins.

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