Branding Strategy Insider

A Lesson In Price Integrity

One of my favourite movies is Local Hero. It is the story of a Texan oil firm that attempts to buy out a small Scottish town and turn it into an oil refinery. From the very beginning, writer and director Bill Forsyth had only one man in mind to play Felix Happer, the head of the oil company, who eventually falls in love with the town and saves it from destruction.

He wanted Burt Lancaster.

This presented the producer, David Puttnam, with a problem. Lancaster loved the script, but wanted $2m to play the role. That was a third of the film's entire budget, and far more than the producers could afford.

So negotiations began. For six months, Puttnam tried every tactic he knew to get the price down. Each time, Lancaster reconfirmed his desire to make the film and pointed to the only stumbling block: his $2m fee. With only days left before filming began, the Local Hero production team admitted defeat and agreed to the star's demands. At the film's silver anniversary celebrations in 2008, Puttnam recalled Lancaster's recalcitrance: 'The bugger would never, ever, ever break his price. We ended up paying him the price he quoted at the very first meeting.'

It's a story I retell to my MBA students when we get to the subject of pricing to illustrate one of the topic's most important lessons: you must hold the line. If your quality is good and your targeting and positioning are right, have confidence in the price you have set and do not consider dropping it. It's a lesson that has been drummed into me over the years by many of the senior executives of the top luxury brands that I have worked for. Something cannot be good and cheap. Don't be afraid of a premium price or maintaining it in the face of market pressure.

Variable Pricing and Brand Destruction

A former New York Times editor recently wrote a full-page article for Forbes magazine advocating “variable pricing” for art museums.

“Art institution directors should start thinking like airline yield managers,” was the subhead of the article.

That’s strange. You might think the yield-management gurus would have the airlines rolling in dough. But that hasn’t happened.

Take the five largest U.S. airlines. United went bankrupt. Delta went bankrupt. Northwest went bankrupt. US Airways went bankrupt. And American Airlines is losing money. In the last 10 years, American has had revenues of $199.8 billion and managed to lose $6.7 billion. Not exactly an industry to emulate.

Why do otherwise intelligent people borrow ideas and concepts from failing industries and think they will succeed in a different setting?

The unfortunate answer to that question is that in today’s world, ideas and concepts don’t seem to matter. What matters is “execution.”

If you can execute well, goes the thinking, you are going to win. Which in itself is true. What is not true is that execution is unrelated to the power of the ideas and concepts driving the business.

Variable pricing is one of those ideas. No matter how well you execute a variable pricing strategy, you wind up undermining the brand.

Customer Experience Defining Value In Retail

A friend in the restaurant business confided over a bottle of wine that he could always tell when a restaurant was in trouble. Deftly peeling back the linen of the breadbasket, he pointed out that the rustic bread had gone missing, replaced by a de rigueur white rolls. Such little things lead like breadcrumbs to the same old story: a retailer fighting for its life not by dialing up a customer's pleasure, but by diminishing it, ingredient by ingredient, value by value, service by service.

There is a lesson there for retail brands as they find their way to the new consumer in the new marketplace. No one would even begin to call it easy out there as stores struggle to stay afloat with tighter credit, excess inventory, and often more salespeople on the floor than customers, accompanied by a distinct lack of service and deliveries that are late, misaddressed, or forgotten.

But the reaction to cut back on what pleases the customer, and think it goes unregistered, is so misguided an approach it deserves comment -- especially because Brand Keys' data shows that every year it is the shopping experience that continues to drive what value in retail is really all about.

Price (or even paying a bit more) is not the central issue. It never was. It isn't now. If price were all that mattered, we would all be driving Hyundai Accents. Value is what matters -- it now matters more than ever as a new consumer consciousness, born of this year's hard lessons, takes the helm.

Can Marketers Increase Share Price?

We're happy to answer marketing questions from BSI readers like you...

Maria, a Marketing VP in Australia writes:

"I have a question for you relating to the correlation between brand value and share price. Do you think that marketers could aim at increasing share price directly through marketing campaigns? I recognise that PR definitely can but I do not understand where marketing fits in."

Maria, thanks for asking. Indirectly, brand marketing affects share price, especially over time. For instance, by building brand awareness or reinforcing a unique and compelling brand benefit, marketing can increase three items that can lead to higher share price in the future:

•    Customer loyalty
•    Product/service sales
•    Ability to charge a price premium

Strong brands also help attract and retain competent employees, sometimes at a salary discount, if the brand’s reputation is strong enough.  This, in turn should lead to increased sales and profitability in the long run.

I think it is overly ambitious to think that a brand marketing campaign could increase share price in the short term unless its message was similar to that of a press release targeted at the financial community. But, that would be more of a financial analyst campaign then a traditional brand marketing campaign.

Have a question related to branding? Just Ask…

Sponsored By: Brand Aid

ROI, Brand Value Calculators

One of the five drivers of brand insistence is value. Value is a function of two things: (1) benefits delivered and (2) cost of receiving those benefits. For business-to-business brands, value often translates directly to ROI. It will benefit brands in many business-to-business categories to create a brand value (or ROI) calculator and post it on a website or otherwise make it available to customers and potential customers.

Brands that offer superior long-term ROI can use the calculator to demonstrate that while their products and services might be more expensive upfront, the long-term savings realized from using them more than compensate for their higher upfront price. Creating an ROI calculator enables all of the efficiencies and savings that they deliver to be captured and compared to those of their competitors in a very concrete way.

The calculator can be designed to highlight the advantages that your brand offers over its competitors. Additionally, it can attract potential customers to your brand’s website and reinforce the value-added services (in this case, the calculator itself) that they can come to expect from your brand.

The calculator captures the following types of variables and assumptions: purchase cost, maintenance costs, replacement parts costs, average downtime frequency and duration, out-of-service costs, ongoing energy usage and costs, non-compliance fines and surcharges, estimated (or guaranteed minimum) product life, performance efficiency, ability to charge a price premium for product usage, etc.

We would be happy to help you develop a brand value / ROI calculator for your brand.

Sponsored By: Brand Aid

Price Reductions Threaten Brands

Price is often the enemy of differentiation. By definition, being different should be worth something. It's the reason that supports the case for paying a little more for a product or service. But when price becomes the focus of a message or a company's marketing activities, you are beginning to be perceived as being unique. What you're doing is making price the main consideration for picking you over your competition. That's not a healthy way to go.

Few companies find happiness with this approach for the simple reason that every one of your competitors has access to a pencil. And with it, they can mark down their prices any time they want. There goes your advantage. 

Getting Around Price

Market leaders will always be attacked on price. It appears to be almost a law of nature. So what do you do? Do you have to match all their moves that are made against you? Well, there are some tried-and-true methods of getting around a price attack:

1. Do something special. The leader can go to its biggest customer and offer something special. Nike went to Foot Locker with Tuned Air, a $130 running show that they make exclusively for the big shoe retailer. So far, so good. Foot Locker has ordered more than a million pairs. 

2. Cause some confusion. In some industries, pricing can be quite complicated. Some years ago, MCI launched their Friends & Families discount program. The deal was discounts on those calls you made to your friends and families as well as to those that were made to you. AT&T ignored this for a while, but MCI's market share started to climb. Eventually, AT&T introduced "MCI math." This aggressive ad program challenged those MCI rates as not being very much when you got past the small print (the 20% discount shrunk to about 6%, which worked out to pennies on a phone call.) AS the arguments raged, the market became confused about what was a real discount and what wasn't. Other discounts from Sprint and a new breed of telephone discounters only added to the confusion. MCI's market share progress was halted. Who wins when the market is confused? You guessed it: the leader. People just figured, "Why bother? Let's stay with AT&T."

Strategic Pricing's 3 Keys

A survey from the Chartered Institute of Marketing suggests British marketers are lost when it comes to setting prices for their products.

According to the report, the most extensively used technique for pricing was 'face-to-face research'.

A report from consultants McKinsey observed that many firms set prices based solely on anecdotal evidence.

You will struggle to find a marketing textbook that defines the 'face-to-face' approach or explains the role of anecdotal evidence in marketing decisions because, of course, both are hallmarks of marketing managers who don't have the faintest idea.

Times are changing, however. The introduction of the euro, in particular, has ensured that most European marketing managers have been faced with a huge number of simultaneous price changes and very few 'anecdotal' guidelines to help structure their thinking.

There are three key constructs to consider when setting a price. The first task for any pricing decision is to determine the value of the offering to the customer. Inevitably, any market research into this area will reveal that different customers can derive very different utility from the same product or service and thus a hallmark of a good pricing strategy is that it is usually combined with the parsimonious segmentation of the market.

Price: Friend and Foe of Brands

People buy a brand because it stands for something. People buy commodities because they are the cheapest alternative available. It is worth pointing out that brands are not created that way, they all begin life as commodities.

Once upon a time Microsoft was just software, Nike was just running shoes and BMW was just a car manufacturer from Bavaria.

The challenge for any marketer is to expedite a transformation and take a commodity, like water, and turn it into a brand, like Evian. This process is called 'brand building' and involves associating a product with values and meanings that the target audience aspire to.

Advertising, sponsorships, endorsement, packaging and a thousand other techniques can be used to link product to meaning and thereby transform a commodity into a brand. Eventually the brand is built and consumers no longer consider it a commodity and are prepared to pay much more for it as a result.

Many marketers do not appreciate that this process can also be reversed.

Sorry Marketers, You Can't Go Up

Zale's, the king of middle-market jewelry, tried to sell more expensive jewelry. They had little success.

Wrangler, a brand that sells $15 dollar jeans at Wal-Mart, tried to sell $190 jeans at Barney's. They had little success.

Wal-Mart launched a marketing effort to sell more higher-priced merchandise as a way to get business from Target. They will have little success.

What these companies fail to understand is that it is exceptionally difficult to take a well-established brand up in price or value. The automobile people have a long history of failure in this regard.

Years ago, Cadillac tried to take a $50,000 Allante against Mercedes. They had little success.

More recently, Volkswagen tried to sell a $60,000 Phaeton against Mercedes and BMW. They had no success.

Cadillac’s only hope of competing with the super-premium cars is with a different brand. If they had dusted off an old, classic brand, called it LaSalle, and reintroduced it as America's first super-premium car, they might have had a better chance of success. But of course, they would have probably upset a large number of Cadillac dealers who want to continue to offer General Motor's top-of-the-line automobile.

As for Volkswagen, they already own the Audi brand. So why try and compete with them?

What all these companies fail to understand is that it is not what you want to do, it is what your customers will let you do. But even more importantly, it's what their perceptions will let you do.

Understanding Reference Prices

People often compare a product’s price to a “reference price” that they maintain in their minds for the product or product category in question.  A “reference price” is the price that people expect or deem to be reasonable for a certain type of product. 

Several factors affect reference prices:

•    Memory of past prices
•    Frame of reference (compared to competitive prices, pre-sale prices, manufacturer’s suggested prices, channel-specific prices, marked prices before discounts, substitute product prices, etc.)
➢    Creating the most advantageous (and believable) competitive frame of reference is essential to achieving a price premium
•    Prices of other products on the same shelf, in the same catalog, or in the same product line
➢    The addition of a more premium priced product typically increases sales of other lower-priced products in the same product line
•    The way the price is presented – for instance, absolute number versus per quart, per pound, per hour of use, per application, for the result achieved, etc.; also four simple payments of $69.95 versus $279.80; for automobiles: total purchase price versus monthly loan payment versus monthly lease payment
•    The order in which people see a range of prices – like when a realtor uses the trick of showing the poorest value house first.

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