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Pricing Power: A Brand’s Most Valuable but Under-Valued Asset
Having spent some time observing the rise and fall of brands across many different categories and countries, I have come to the conclusion that brands fail not because they lose market share, but because they lose pricing power. Through the company’s own inaction or competitive action, the brand fails to command any price premium—and once lost, that premium is very difficult to recover. So why do so many companies ignore their brands’ pricing power?
What makes the failure to manage price so strange is that the classical definition of a brand’s value used to be the price that the brand could command over a generic competitor. Today, however, marketers appear to have become fixated on driving sales irrespective of price paid. Lower prices, in the form of in-store discounts and online incentives, have become a widespread mechanism used to generate more sales without regard for profitability.
Even stranger is that, in parallel to this shift, it has become legitimate to include brands as assets on the company’s balance sheet. Companies now regularly add brand acquisitions to their financial statements, and three major rankings of brand value have come into existence. However, only Millward Brown’s BrandZ Top 100 Most Valuable Global Brands ranking actually takes consumer opinion into account in order to determine that value. Again, somehow the power of the brand seems to have become decoupled from its origins: the ability to create and sustain a long-term flow of profit by making people want to buy the product or service, and to pay a good price for it.
In Brand Premium: How Smart Brands Make More Money, I demonstrate how consumers’ brand attitudes impact three important outcomes that drive financial performance: willingness to buy, perceptions that the price asked is worth paying, and future growth potential. I show how Millward Brown’s power, premium and potential metrics relate not just to value market share, but also to operating profit. Brands that scored high on both power and potential returned a profit margin 31% higher than brands that scored low on both measures.
I would argue that the additional margin returned by a strong brand is, in large part, due to the pricing power that it commands. The evidence that consumer attitudes matter, particularly in relation to price paid, has continued to build. In 2014, Millward Brown integrated its attitudinal survey data with behavioral purchasing data from Colmar Brunton’s NZ Fly Buys shopper panel and found that consumers pay more on average for brands that they consider meaningfully different from the competition. Based on survey data alone, a premium score was calculated for each brand for each respondent in the survey. Brands that people believed were meaningful (met their needs and were more appealing than the competition) and different (unique or trendsetting) had a higher premium score. The higher an individual’s premium score for a brand, the more likely the individual is to pay a premium for that brand. On average, people paid 39% more for high premium brands (the top third of premium scores compared with the bottom third).
The finding that meaningfully different brands can command a significant price premium helps explain why many brands find themselves trading margin for sales volume. The underlying problem usually originates from weak consumer demand. People either simply do not want to buy the brand, or are not willing or able to pay the price asked, even if they still find the brand desirable. New competitive innovation often leaves these brands seeming outdated and outmoded. Unless the brand can boost perceptions of positive differentiation, people will only buy at lower prices. Particularly when retailers or resellers are involved, there is huge pressure to maintain sales volume, and one of the easiest ways of doing so is to discount the brand.
When brands resort to discounting, sales and market share often remain stable. In fact, sales may well increase as lower prices may attract new, price-sensitive buyers who previously regarded the brand as too expensive. Brand managers may get lured into a false sense of security because many attitudinal metrics also will reflect the size and salience of the brand. Unfortunately, however, these big brands are not strong brands. Purchase is supported by habit and low prices—not real attitudinal loyalty—and is vulnerable to competitive action.
Take the case of one big brand leader: Rather than offering an improved brand experience or adapting its offer to be more relevant to fend off new competition within its category, it resorted to price discounting. Perceptions that the brand had something different to offer fell, undermining its ability to justify its price point. Five years later, sales were flat and the operating margin was less than a fifth of what it had been.
Sadly, this example is far from uncommon. Brand attitudes affect more than whether people will choose a brand. They affect how much people are willing to pay for it, as well. Unless a brand is seen to be different in some way that resonates with consumers, it will become commoditized. Marketers would do well to ensure that their brand is seen as meaningfully different from its competition if they wish to maintain its long-term profitability.
Nigel Hollis is executive vice president and chief global analyst at New York-based global market research firm Millward Brown, and his book, Brand Premium, is the recipient of the 2015 Berry-AMA Book Prize for the best book in marketing.