By Marina Stuefer, Managing Partner, Gain Theory
What is your brand’s superpower? Perhaps you think it’s the trust your customers have in the product or service you offer, the availability provided by an exclusive distribution deal, or the awareness created by a successful advertising campaign.
All these superpowers are important, but marketers should have more confidence in their ability to demonstrate how their brand influences pricing.
Having this ability is particularly useful given pricing is more important than ever in the current macroeconomic environment, as Nestle’s CFO outlined in a recent earnings call: “It is critical that we price to the fullest extent possible to provide the margin for future investment behind our brands,” Anna Mainz said, in relation to the increased cost of two key raw materials – coffee and cocoa.
Why it’s crucial to understand price elasticity
To understand pricing, you need to understand – or remind yourself about – price elasticity. This is what happens to the demand for your product or service when the price that you charge goes up or down. The relationship can be either:
However, while many marketers may be aware intellectually of their ability to influence price and drive growth, it’s not something they instinctively think about or act on.
There are a number of reasons for this, not least that marketing often doesn’t have control over pricing – despite it being one of the 4 Ps. But a perceived inability to measure how key marketing levers – particularly advertising – impact pricing has also been a stumbling block.
The good news is that there are a range of advanced measurement tools and approaches that enable marketers to do this today. Let’s look at three examples.
Price elasticities in CPG
Work we’ve undertaken over with multiple brands in this sector over the past 25 years shows that price elasticities can and do change, often in a predictable fashion in the presence of consistent messaging and a strong share of voice.
From a measurement perspective we take a two-step approach. First, we build a marketing mix model (MMM) that measures how price elasticities have evolved over time. We then build a second model that links changes in price elasticity to specific marketing activities, such as an advertising campaign. Crucially we do this both for your brand and your key competitors.
By understanding the price elasticity and seeing how it has evolved over time, we can determine whether a price increase will drive profitability higher or destroy it. If the elasticity is too high, we also know how best to reduce sensitivity through advertising; for example, by selecting the most effective channels or changing the message.
Price perception in retail
Price perception is another powerful diagnostic that is very useful in today’s hyper competitive retail environment where it’s easy for consumers to compare prices.
The measurement approach is the same as for price elasticities in the example above. First, we build an MMM that measures how price perception has evolved over time. We then build a second model that links changes in price perception to specific marketing activities.
Increasing the overall perception of your brand as being good value for money can increase in-year ROI three-fold, according to our analysis. One of the levers we often see retailers use to do this is offering differential pricing for loyalty card holders. These effects tend to be sticky and longer lasting than the conventional short-term increase in sales we often see from advertising.
Value premiums in banking
A common challenge within retail banking is understanding how the strength of your brand affects consumer decisions around your products and services and how this relates to pricing power.
Using a technique called conjoint analysis, we can understand how potential consumers value different attributes of a product or service and then measure the volume and value premium that a brand benefits from. In turn, this information feeds through into pricing decisions.
For example, if a mortgage product has a strong value premium then it implies that the bank can charge a higher price for it. This information can then be used to demonstrate how quarterly and annual business targets are hit.
The risks of not developing this superpower
I’m sure we’ve all seen examples of what happens when brands don’t get their pricing right or are forced into changes due to circumstances beyond their control. Last year, the CEO of McDonald’s said disappointing financial results had forced the company into a “comprehensive rethink” of pricing. He told investors that the firm would lean on discounts to try to stop a sales decline. This year, many companies are being forced to increase prices as a result of tariff increases by President Trump; the CEO of Adidas said the prices of some its products would have to rise if the tariffs remain in place.
Marketers who are able to demonstrate how their investments influence pricing will be in a strong position to contribute to strategic business discussions like this. Building a robust measurement strategy that includes a range of advanced analytic techniques is an important part of developing the capabilities marketers need to make this happen. The data-driven insights they generate can help marketers to provide evidence of what’s working, what’s not, and why. In turn, this builds trust in marketing in the boardroom. Now that’s a superpower worth shouting about.
