| September 16, 2015
I believe that brands must maintain their pricing power if they are to create sustainable financial value growth. Yes, brands need to sell more in order to grow, but they also need to maintain their margins while doing so. All too often brands end up trading margin to support market share, and never regain the same profitability.
There are a host of potential reasons why margins erode in this way. Retailers reward volume sales and demand regular price promotions, the sales team negotiates price with the retailers and has volume targets to meet, management pay too much attention to competitive pricing and respond in kind, even when unnecessary. There is also the fact that management information systems tend to report what is easily available, not what really matters.
As I noted in Brand Premium, how smart brands make more money,
“People are willing to pay a premium for a brand if they feel they are getting something from buying that brand that they cannot get elsewhere…Premium brands only need to be different enough to command their existing price point or fend off potential competitors. Differentiation can incur diminishing returns if people have to pay a substantial premium that is out of line with their ability to detect or appreciate what is different.”
So how do you know whether your brand is different enough to command its price point? You can play fancy, and somewhat artificial, trade-off games or you can simply ask in your regular brand equity check-up (you do conduct these, right?). When Millward Brown relaunched BrandDynamics back in 2012 we introduced our Brand Premium metric to measure a brand’s pricing power alongside our sales (Power) and growth (Potential) metrics. Like the other two, Premium is calculated based only on perceptions of meaning, difference and salience, but unlike Power perceptions of difference have far more impact on a brand’s Premium score.
In validation studies we have seen that people do behave as predicted in our equity studies. People will pay up to 39 percent more for brands with a high Premium score. Now, based on three years’ experience we have improved Premium’s ability to predict a brand’s pricing power. The new metric better reflects how people perceive the brands in a category to be priced relative to each other, and also accounts for the fact that some consumers are price-driven; for them a brand’s price point is its meaningful difference.
There is an old adage that if it matters you should measure it. Brand Premium is a unique brand equity measure based solely on consumer perceptions that ought to help management teams manage their brands more profitably, if only they would recognize that the power of a brand affects the price people are willing to pay, not just their desire to choose it.
So what do you think is the biggest reason companies often end up trading margin for volume? Will a better measure of pricing power help? Please share your thoughts.