Kantar Millward Brown

Point of View

Why Is It Always Volume Before Price?

It has been 10 years since McKinsey published proof that a price increase of 1 percent will produce an 8 percent increase in profit, assuming that all other things remain equal. So why are companies ignoring this and focusing on chasing volume instead of securing margins through well-informed pricing strategies?

Perhaps the answer lies in a need for short-term results brought about by shareholder pressure, a "now" mentality that needs to see results yesterday, along with a business culture in which people advance quickly through positions, creating a lack of continuity in senior marketing roles.

Whatever the cause, the result is a disconnect between short-term volume boosts driven by price cutting (which are easily and immediately measured), and the long-term brand investment that can sustain a price premium and secure margins. We have consistently seen, even during recessions, that consumers are willing to pay more for brands that they perceive are worth it. That is one reason why the share price of the most valuable brands consistently outperforms the S&P 500, even during tough economic times. In fact, during the 2008 global recession the value of the top 100 brands increased by 2 percent to $2 trillion.

Even during recessions, consumers are willing to pay more for brands that they perceive are worth it.

While pressure from key stakeholders may be considerable, marketers should not make pricing decisions based on short-term targets. Rather, they should invest in research to quantify the role of price in their long-term brand strategies. The understanding gained will result in much better informed pricing decisions.

Price associations can generate demand

Most marketers acknowledge that strong brands benefit from positive brand associations in the minds of consumers. However, associations with price are often considered separately from other equity-driving perceptions; price is frequently seen as a different type of influence. But as Gordon Pincott argued in his Point of View "Brand Equity: What's Price Got to Do with it?", perceptions of price can in fact be a critical part of the association set that determines brand equity and the resulting long-term volume demand.

In the UK airline category, for example, we have found that associations relating to low cost (such as offering more acceptable prices and offering good deals and promotions) are the second most important group of brand associations for generating demand. This importance is driven by the low-cost airlines such as easyJet.

However, in spite of the fact that low price is a key factor in generating demand, there are some brands that won't benefit from an association with low price. For example, for Singapore Airlines, demand is generated by the associations of exclusivity supported by perceptions of high price.

There are also some brands that need to avoid strong associations with either high or low prices; British Airways is an example. The airline needs to avoid too strong an association with high prices in order to maintain volume demand for cheaper European hops, but it must also maintain some sense of exclusivity to support demand for long haul business and first-class flights.

Brand associations can support a price premium

Even when marketers recognize that price perceptions may have a role in securing volume demand in the long term, they often still fail to ask themselves what mix of brand associations will best justify a premium price point for their brand. When trying to measure and build brand equity they still default to drivers of preference and volume. But for many brands, the main financial return delivered by brand equity is the ability to charge a price premium. To ensure the long-term financial health of these brands, managers must understand and manage the associations that support this ability.

Though there is some overlap between the brand associations that generate volume demand and those that support a price premium, the optimum brand strategies for each task will rarely be identical. We generally fi nd that the best way to drive volume demand is to build very strong associations with core category needs, whereas to justify a price premium, brands usually need to go beyond core needs to show that they offer a meaningful difference—that they are unique or a step ahead of the competition in some way.

For many brands, the main financial return delivered by brand equity is the ability to charge a price premium.

They may do this by offering exclusive product features or cutting-edge innovation; often, however, a brand may establish a meaningful difference that justifies a price premium through establishing intangible associations that are unique to them. With British Airways, for example, the sense of connection that their customers feel with one another makes the brand stand out from other airlines, thus making consumers willing to pay more.

If brand owners continue to design their strategies solely around what drives volume demand while ignoring the perceptions that can defend a price premium, they will inevitably struggle to justify high price points, and even if the brand penetration grows, profits will suffer. Consequently, Millward Brown has developed two metrics to measure equity: "Power," to measure the equity that delivers volume; and "Premium," to measure the equity that justifies a higher price. Using the concepts represented by Power and Premium, you can understand your brand's situation and shape and optimize your pricing strategy.

Figure 1: Pricing rules based on power and premium

Determine pricing strategy using both power and premium

Figure 1 illustrates the possible relationships between Power and Premium scores and shows how a brand's standing on these dimensions can help to identify a pricing strategy. For a brand like easyJet, Power far exceeds Premium; thus it would sit in the lower right-hand box. A brand in this position would be right to maintain its primary focus on driving volume (both through equity driven demand and in-market deals).

However, brands like Singapore Airlines, which are low on Power and high on Premium, would sit in the top left-hand box. Brands like these deliver returns by charging a premium price; thus they should keep their price high and focus on building the associations that will justify that premium.

Plotting brands on the Power/Premium axes can help managers of brand portfolios ensure that each brand occupies a different position. If we looked at Unilever brands in the U.S. shampoo market, for example, we would see Nexus occupy the top left-hand corner, meaning that it can continue to position itself as a premium brand. Suave, which targets the value shopper, would be situated in the lower right-hand box.

Dove and TRESemmé would be right in the middle.Brands in this position could conceivably be moved toward more premium or more value-for-money positions. To do this, they would have to increase relevant brand associations and possibly adjust their prices while taking care that the brands remain differentiated from other Unilever offerings.

Don't accept the status quo

A brand's position on the Power/Premium plot is not necessarily its destiny. As discussed earlier, the key is to understand which image associations can generate volume demand and which ones justify a price premium, and then feed that information into your brand strategy.

Specifically, you should follow these steps:

  1. Identify the images that contribute most to generating volume demand and justifying a price premium in your category, as well as those that may be uniquely important to your brand
  2. Understand the current strength of associations for your brand in these areas. Is there room to increase them?
  3. Consider the feasibility of your brand owning one or more of these associations and actually communicating them.

Having gone through this process, you are in a position to tailor a brand strategy and communications plan that supports your chosen pricing strategy.

Actual in-market pricing

Finally, once you have selected a pricing strategy and tailored communication to support it, you need to understand the in-market price points that any given product variant or SKU can command.A conjoint or econometric sales model will provide you with the tools to answer this question by pinpointing the prices and promotions to use to obtain your sales and profit targets.

Too often this type of analysis is done with the objective of deciding what tactics to use to meet short-term targets. The overall brand strategy is not kept in view; hence the current situation of short-term price cutting and possible negative impact on the brand. However, this information,combined with your overall brand-building strategy, will provide you with concrete facts and a strategic plan with which to negotiate terms and build good relationships with suppliers and/or retailers, while supporting the long-term success of your business.

Conclusion

All too often, pricing decisions are made for specific products based only on a consideration of the short-term return that different price points will deliver. And even when price is considered as a key feed into long-term brand equity, the focus is usually on the impact this future equity will have on volume demand. There has been a lack of emphasis on the role of brand equity in supporting a price premium, and hence potential for further profit has been lost.

A holistic understanding of the most suitable pricing strategy for a brand can only come with an understanding of the brand's dual roles:generating volume and supporting a price premium. Only with that understanding can we make informed decisions about specific price points that will optimize both short-term volume and long-term brand health.

When you combine all of these elements in your approach to pricing, you are in a good place to deliver long- and short-term sales targets while at the same time reassuring all stakeholders that your strategy is based on solid research and facts.

Rachel Leaver
UK Head of Marketing Science
Millward Brown
rachel.leaver@millwardbrown.com
Josh Samuel
European Development Director, Brand Equity
Millward Brown
josh.samuel@millwardbrown.com