Branding Strategy Insider

Marketing And The Psychology Of Savings

Yesterday, I splurged on an expensive hair treatment that promises to give me frizz-free hair for 12 weeks. I first learned of this treatment a year ago, but rejected it as a frivolous indulgence at $350 a treatment. But when I was told of a $129 price promotion on the same treatment, I immediately said, ‘Sign me up!’  Now at $129, frizz-free hair is still a frivolous indulgence -- but think of the ‘value’!  A similar mechanism was at work last month when I spent more than I intended to on a car. The more expensive car had a higher discount. How could I pass up the greater ‘value’, even if it was costing me more?

As marketers we know consumers do not always behave rationally. That’s because value is perceived, and price is just one part of the value equation.  Our skill as marketers is often measured by how effectively we enhance a product’s perceived value and thereby contribute to maximizing revenue and profit.

It’s chic to be cheap and frugality is fashionable.

Getting consumers to part with discretionary dollars has been especially difficult the past few years. The Recession made even those consumers not affected by job loss or stock market crashes more interested in savings. In 1973, price consciousness was found to be inversely related to social class (income).  I doubt those findings could be replicated today. 

One survey found the number of ‘confident’ consumers saying coupons influence where they shop increased from 25% to 33% between 2007 and 2009. At the same time the number of ‘anxious’ consumers indicating the same thing increased almost identically, from 27% to 32%.

According to IRI/Symphony, as of October 2010, nearly three-quarters of consumers report that price has become ‘a more important consideration than convenience in brand purchases’ and over three-quarters say they are more likely to choose a store because it offers lower prices on things I need. Fully 83% say they are ‘more likely to stock up on certain items if they go on sale’ and 81% say they are ‘more likely to look for sale prices throughout the store.’

Pricing Strategy: Focus On Value Exchange

Our understanding of pricing has come a long way since 1890 when Alfred Marshall published his treatise on the economic scissors of supply and demand. Pricing is no longer a purely economic challenge to be addressed through studies of market elasticity. It can't be solved by lowering prices until customers' purchases improve factory utilization rates. And, it can't be solved by allocating costs and adding markups. Rather, pricing today must be focused on value exchange. 

While experts and executives agree that price should reflect value, the pricing to value mantra fails to clarify the decisions executives must make. That is, what is the value that price should reflect? Whose perception of value should determine price? And, how can value be modeled and quantified? In other words, pricing decisions today requires actionable insights. 

These insights must derive from a marketing orientation of the firm with a clear economic understanding of value exchange. The marketing orientation focuses the purpose of the firm towards serving customer needs profitably - an orientation supported by the late greats Peter Drucker and Theodore Levitt. The economic understanding of value exchange reminds us that customers will purchase when the product delivers value in excess of its price after adjusting for alternatives, and the firm must deliver products at a price in excess of their cost. These are two very simple concepts. 

Combined, the marketing orientation of the firm, and the economic understanding of value exchange, provides the foundation for developing insights required for executive decision making in pricing strategy. 

Brand Leadership Equals Business Leadership

The successful creation and management of brands will be the hallmark of business leadership in the 21^st century. Does that sound bold? Perhaps, but the world today is far different from what it was only a couple of decades ago and these structural changes have placed brands at the forefront of business success. A review of stocks in the S&P index shows that businesses that own stronger brands perform significantly better than businesses that own weaker brands. 

Business leadership and brand leadership have become inextricably linked.

According to Millward Brown Optimor’s analysis, in 1980 virtually the entire value of an average S&P 500 company was comprised of tangible assets (chairs, factories, inventory, etetera). In 2010, tangible assets account for only 30 to 40 percent of a company’s value. The rest is intangible value, and about half of that intangible portion, close to 30 percent of total business value, is attributed to brands. Therefore it is not a stretch to say that for many companies, brand is their single biggest asset. What has led to this change in what matters to business success?

Why is brand driving business leadership – the Post-Information Era

The technological advances of the 20^th century generated more prosperity than ever existed before. Consumers in developed markets came to have almost limitless choices in almost every category. What is more, as companies innovated into new spaces, there are now many new categories to choose from.

Abundance and prosperity have allowed companies to redefine what consumers “need.” Yet wealth hasn’t necessarily made us much happier. As Daniel Pink writes in A Whole New Mind, “The paradox of prosperity is that while living standards have risen steadily decade after decade, personal, family and life satisfaction haven’t budged. That’s why more people – liberated by prosperity but not fulfilled by it – are resolving the paradox by searching for meaning.” This quest for meaning has huge implications for brands. As people find their basic consumption needs satisfied, brands are uniquely positioned to help add a higher order of meaning and fulfillment to purchase decisions, and consumers’ lives. 

Low Price Advertising: Enemy Of Brands

 

Nowhere in marketing today do emotions run hotter than when it comes to the role of (low) prices highlighted in advertising. 

In boardrooms everywhere, one can imagine what's being said, we need to make some money fast so let's lower our prices, and let everybody know.

So CEOs and CFOs carry the day while CMOs beat a quick retreat to let the ad agencies know what to do.

Only it's a bad idea to lead with price in advertising. First, discounting, especially repeatedly, isn't sustainable. One of the key advantages of a sale is the element of surprise. How does surprise register on people's faces? Their eyes go wide, the mouth falls open; it's nature's way of saying: shut up, and notice the world around you.

Surprise aids stopping power in advertising, but surprise fades when you use the reduced-price trick over and over.

Second, surprise is really a pre-emotion. It's brief (less than a second) and followed either by the verdict of the surprise being positive "wow" or a negative yikes! Repeating low pricing leads to expectations of future low prices, desensitization, and the impossibility of creating a wow response. 

Shopper research has shown that seeing any price tag causes disgust. Instinctively, people don't like giving up their money. So creating more delight regarding the offer, generating allure that exceeds feelings of disgust about surrendering cash, makes a positive purchase experience. The problem is that a low-price strategy isn't about the offer's intrinsic value; it's merely a desperate attempt to lower people's disgust levels and, ultimately, given desensitization, is a losing game.

Third, a focus on prices is about numbers, statistics, and carries people from right-brain emotional involvement in advertising to left-brain analytics. That's a bad trade-off, given that everyone feels before they think. Results from the IPA's database of 880 marketing campaigns has found that emotionally-oriented campaigns generate twice as much profitability as traditional, hard-sell rationally-oriented campaigns.

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."