Why Is It Always Volume Before Price?


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In this Point of View Millward Brown's Rachel Leaver and Josh Samuel take a look at the role of pricing in brand success.

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Why Is It Always Volume Before Price?

  1. 1. WHY IS IT ALWAYS VOLUMEBEFORE PRICE?POINT OF VIEWSHARE 1Perhaps the answer lies in a need for short-termresults brought about by shareholder pressure,a “now” mentality that needs to see resultsyesterday, along with a business culture in whichpeople advance quickly through positions, creatinga lack of continuity in senior marketing roles.Whatever the cause, the result is a disconnectbetween short-term volume boosts driven byprice cutting (which are easily and immediatelymeasured), and the long-term brand investment thatcan sustain a price premium and secure margins.We have consistently seen, even during recessions,that consumers are willing to pay more for brandsthat they perceive are worth it. That is one reasonwhy the share price of the most valuable brandsconsistently outperforms the S&P 500, even duringtough economic times. In fact, during the 2008global recession the value of the top 100 brandsincreased by 2 percent to $2 trillion.While pressure from key stakeholders may beconsiderable, marketers should not make pricingdecisions based on short-term targets. Rather,they should invest in research to quantify the roleof price in their long-term brand strategies. Theunderstanding gained will result in much better-informed pricing decisions.PRICE ASSOCIATIONS CAN GENERATEDEMANDMost marketers acknowledge that strong brandsbenefit from positive brand associations in theminds of consumers. However, associations withprice are often considered separately from otherequity-driving perceptions; price is frequentlyseen as a different type of influence. But asGordon 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 ofthe association set that determines brand equityand the resulting long-term volume demand.Rachel LeaverUK Head of Marketing ScienceJosh SamuelEuropean Development DirectorBrand EquityWhy Is It Always Volume Before Price?It has been 10 years since McKinsey published proof that a price increaseof 1 percent will produce an 8 percent increase in profit, assuming that allother things remain equal. So why are companies ignoring this and focusingon chasing volume instead of securing margins through well-informedpricing strategies?Even during recessions,consumers are willing to paymore for brands that theyperceive are worth it.
  2. 2. WHY IS IT ALWAYS VOLUMEBEFORE PRICE?POINT OF VIEWSHARE 2In the UK airline category, for example, we havefound that associations relating to low cost (suchas offering more acceptable prices and offeringgood deals and promotions) are the secondmost important group of brand associations forgenerating demand. This importance is driven bythe low-cost airlines such as easyJet.However, in spite of the fact that low price is akey factor in generating demand, there are somebrands that won’t benefit from an association withlow price. For example, for Singapore Airlines,demand is generated by the associations ofexclusivity supported by perceptions of high price.There are also some brands that need to avoidstrong associations with either high or low prices;British Airways is an example. The airline needsto avoid too strong an association with high pricesin order to maintain volume demand for cheaperEuropean hops, but it must also maintain somesense of exclusivity to support demand for long-haul business and first-class flights.BRAND ASSOCIATIONS CAN SUPPORTA PRICE PREMIUMEven when marketers recognize that priceperceptions may have a role in securing volumedemand in the long term, they often still fail toask themselves what mix of brand associationswill best justify a premium price point for theirbrand. When trying to measure and build brandequity they still default to drivers of preference andvolume. But for many brands, the main financialreturn delivered by brand equity is the ability tocharge a price premium. To ensure the long-termfinancial health of these brands, managers mustunderstand and manage the associations thatsupport this ability.Though there is some overlap between the brandassociations that generate volume demand andthose that support a price premium, the optimumbrand strategies for each task will rarely beidentical. We generally find that the best wayto drive volume demand is to build very strongassociations with core category needs, whereasto justify a price premium, brands usually need togo beyond core needs to show that they offer ameaningful difference—that they are unique ora step ahead of the competition in some way.They may do this by offering exclusive productfeatures or cutting-edge innovation; often,however, a brand may establish a meaningfuldifference that justifies a price premium throughestablishing intangible associations that are uniqueto them. With British Airways, for example, thesense of connection that their customers feel withone another makes the brand stand out from otherairlines, thus making consumers willing to pay more.If brand owners continue to design their strategiessolely around what drives volume demand whileignoring the perceptions that can defend a pricepremium, they will inevitably struggle to justify highprice points, and even if the brand penetrationgrows, profits will suffer. Consequently, MillwardBrown has developed two metrics to measureequity: “Power,” to measure the equity that deliversvolume; and “Premium,” to measure the equitythat justifies a higher price. Using the conceptsrepresented by Power and Premium, you canunderstand your brand’s situation and shape andoptimize your pricing strategy.For many brands,the mainfinancial return delivered bybrand equity is the ability tocharge a price premium.
  3. 3. WHY IS IT ALWAYS VOLUMEBEFORE PRICE?POINT OF VIEWSHARE 3DETERMINE PRICING STRATEGY USINGBOTH POWER AND PREMIUMFigure 1 illustrates the possible relationshipsbetween Power and Premium scores and showshow a brand’s standing on these dimensions canhelp to identify a pricing strategy. For a brandlike easyJet, Power far exceeds Premium; thus itwould sit in the lower right-hand box. A brand inthis position would be right to maintain its primaryfocus on driving volume (both through equity-driven demand and in-market deals).However, brands like Singapore Airlines, whichare low on Power and high on Premium, would sitin the top left-hand box. Brands like these deliverreturns by charging a premium price; thus theyshould keep their price high and focus on buildingthe associations that will justify that premium.Plotting brands on the Power/Premium axes canhelp managers of brand portfolios ensure thateach brand occupies a different position. If welooked at Unilever brands in the U.S. shampoomarket, for example, we would see Nexus occupythe top left-hand corner, meaning that it cancontinue to position itself as a premium brand.Suave, which targets the value shopper, would besituated in the lower right-hand box.Dove and TRESemmé would be right in the middle.Brands in this position could conceivably be movedtoward more premium or more value-for-moneypositions. To do this, they would have to increaserelevant brand associations and possibly adjusttheir prices while taking care that the brands remaindifferentiated from other Unilever offerings.DON’T ACCEPT THE STATUS QUOA brand’s position on the Power/Premium plot isnot necessarily its destiny. As discussed earlier, thekey is to understand which image associations cangenerate volume demand and which ones justify aprice premium, and then feed that information intoyour brand strategy.Specifically, you should follow these steps:1. Identify the images that contribute most togenerating volume demand and justifying a pricepremium in your category, as well as those that maybe uniquely important to your brand2. Understand the current strength of associationsfor your brand in these areas. Is there room toincrease them?3. Consider the feasibility of your brand owningone or more of these associations and actuallycommunicating them.Power Premium BrandsUnderperforming BrandsPremium BrandsValue BrandsPOWERPREMIUMKeep price high Keep price highUse tactical price promotionsto drive additional volumeKeep price lowRefocus brandBest returns at high price point Good returns at any price pointLower returns at any price point Best returns at low price pointFIGURE 1: PRICING RULES BASED ON POWER AND PREMIUM
  4. 4. WHY IS IT ALWAYS VOLUMEBEFORE PRICE?POINT OF VIEWSHARE 4Having gone through this process, you are in aposition to tailor a brand strategy and communicationsplan that supports your chosen pricing strategy.ACTUAL IN-MARKET PRICINGFinally, once you have selected a pricing strategyand tailored communication to support it, youneed to understand the in-market price points thatany given product variant or SKU can command.A conjoint or econometric sales model will provideyou with the tools to answer this question bypinpointing the prices and promotions to use toobtain your sales and profit targets.Too often this type of analysis is done with theobjective of deciding what tactics to use to meetshort-term targets. The overall brand strategyis not kept in view; hence the current situationof short-term price cutting and possible negativeimpact on the brand. However, this information,combined with your overall brand-buildingstrategy, will provide you with concrete facts anda strategic plan with which to negotiate termsand build good relationships with suppliers and/or retailers, while supporting the long-termsuccess of your business.CONCLUSIONAll too often, pricing decisions are made forspecific products based only on a considerationof the short-term return that different price pointswill deliver. And even when price is consideredas a key feed into long-term brand equity, thefocus is usually on the impact this future equitywill have on volume demand. There has beena lack of emphasis on the role of brand equity insupporting a price premium, and hence potentialfor further profit has been lost.A holistic understanding of the most suitablepricing strategy for a brand can only comewith an understanding of the brand’s dual roles:generating volume and supporting a pricepremium. Only with that understanding can wemake informed decisions about specific pricepoints that will optimize both short-term volumeand long-term brand health.When you combine all of these elements inyour approach to pricing, you are in a goodplace to deliver long- and short-term salestargets while at the same time reassuring allstakeholders that your strategy is based onsolid research and facts.To read more about the effect ofprice on brand equity, please visitwww.mb-blog.com.If you enjoyed “Why Is It AlwaysVolume Before Price?” you might alsobe interested in:“Brand Equity: What’s Price Got to Dowith it?”“U.S. Shampoo: A Tale of Two Brands”“Pricing Right: How High Can You Go?”