Pricing In Perilous Times
Price hikes are par for the course these days. Brands from Nestlé (maker of Kit Kat, Nespresso) Unilever (maker of Dove Soap, Ben & Jerry’s, Hellmann’s), Procter & Gamble (maker of Tide, Swiffer), Mondelez, and Reckitt Benckiser (maker of Air Wick, Lysol and Durex condoms) are raising prices.
But, as these brands know, price hikes only work if the customer perceives the brand to be worth the cost. If the price becomes too high relative to the total brand experience, then the brand is not perceived to be good value for the money.
First, value is more than price point. Value is what the customer receives relative to the costs. Customers have a value equation in their heads. A customer-perceived value equation is based on 1) how the customer perceives the brand’s total experience (defined as functional, emotional and social benefits) relative to 2) how the customer perceives the brand’s costs (defined as money, time and effort). Trust plays a critical role in the customer-perceived value equation as well. Trust acts as a multiplier when customers take mental assessments of a brand’s worth. If a brand has little or no trust, then there is little or no brand value.
In other words, customers today perceive a brand’s worth to be the quality of the expected experience relative to the total brand costs multiplied by trust. This is the new Trustworthy Value Equation.
Second, to generate a Trustworthy Value Equation, the brand’s inherent value must be perceived as fair value. Fairness contains justice, Justice means that the benefits-per-costs equation is equitable, just, dependable, trustworthy and fair. Fairness is more than absolute price. Fairness means that the benefits-per-costs equation is equitable compared to competitive alternatives. A brand must be perceived as a fair value for the expected experience.
Third, value begins with the customer: value is not determined in the conference room and not determined by the marketing department or by the CFO. Although marketers believe they are value creators, they are not. Marketers help to create brands to which customer ascribe value. Marketers determine pricing but not value. Instead of deciding what to charge, marketers should determine if the price they are asking will be a customer-perceived fair value.
Fourth, brands can be perceived as fair value at any price point. This means for some people a Mercedes-Benz S-Class is a fair value while for others a Toyota Prius is a fair value. Marketers must aim their brand to be best values at whichever price point they choose. This treats pricing as a strategy not a tactic. It is the contribution of price relative to benefits that determines whether a brand’s customers perceive the brand to be a great or a poor value.
George S. Day, professor emeritus at Wharton Business School said it best:
“A winning position for customers is superior benefits for an average price. Most businesses position their offerings on the diagonal from the economy to the premium end and thus price their products to capture the customer value they created. How- ever, some of the competitors will be off the diagonal, by accident or design. Those charging average prices for lower benefits are offering inferior value. Below the diagonal is superior value. Above the diagonal is inferior value.”
This leads us to the price raises in our current inflationary economy. Are brand owners inadvertently making their brands poor values based on higher prices? The business press report brand owners are raising prices due to supply backlogs, smaller workforces, climate issues, soaring energy prices and changed customer behaviors such as hoarding. Costs for ingredients and shipping are being passed on to customers. And, the raised prices are not static: some brands continue to raise prices on top of raised prices. Unilever announced recently that it is re-raising prices on some of its big brands. According to The New York Times, Shake Shack restaurants will be raising prices again in March after taking a price raise in October. This will represent a price hike of 6% to 7% over the last six months.
Brand owners have been quite open about the price rises. Mr. Luca Zaramella, CFO of Mondelez stated to Bloomberg BusinessWeek, “I’m worried about prices, particularly around logistics and transportation. We try to pass those to consumers.” For Mondelez, as with other companies it is all about margins. “We announced price increases around the world to ensure that we retain our margins….” Nestlé CEO Mark Schneider told BBC News that “… it was a safe assumption that prices would rise this year. He said there was no place in the company that was exempt of inflation.”
On the other hand, Reckitt Benckiser told BBC News that the company hoped “… to absorb most of the (price) increases.” Reckitt’s CEO Laxman Narasimhan said that the enterprise “… had ways to mitigate and manage pricing.” Reckitt’s CFO said that Reckitt would “… absorb a significant part of higher prices through efficiency and better buying. We are passing some pricing onto consumers but we minimise that through programmes we have… to absorb those cost increases.”
Examining some large brands, The Wall Street Journal wrote that Unilever was already completely dependent on higher prices for growth. For Reckitt Benckiser, two brands in three product categories have already suffered volume declines.
It is not just packaged goods. AB InBev, the global beer company – home of Budweiser, has been raising prices as well. The Wall Street Journal reported that AB InBev has been raising prices since fourth quarter 2021. AB InBev is also focusing more on its high-end, higher priced such as” Michelob Ultra, hard seltzers ready-to-drink cocktails” rather than its “value segments” of Bud and Bud Light.
With inventories extremely low after the manufacturing hit from coronavirus, car dealerships are maxing out prices on new vehicles. Prices are so inflated that, according to The Wall Street Journal, buyers are going miles and miles out of their districts to find an affordable new car. One individual flew from California to Nevada to secure a new vehicle he could afford. “In extreme cases, dealerships are charging $35,000 to $40,000 above MSRP on luxury cars that normally sell for $80,000 or more.” Customer comments in the article indicate that it is the brand that is taking the anger over the huge increases over MSRP. Some people have stated that they may never buy from a dealership again after deciding to buy from Tesla. With no dealerships, Tesla controls the sale.
Brand owners must recognize is that there is quantity of sales and quality of sales. Sales based on higher prices with lower volumes are dangerous. Fast food restaurants have this same challenge: raising prices when there is less customer traffic. Passing costs off to customers, brands risk turning off remaining customers.
Brand leaders should already have invested in price elasticity research. Understanding brand-price elasticity is key to developing and implementing a pricing strategy. Increasing prices can be effective for certain powerful brands. So, brand owners need to figure out in advanced just which of their brands are powerful enough to sustain continuing higher prices. And, since money is part of the Trustworthy Value Equation, if the brand experience is awful such as the car dealerships are creating, the brand’s worth diminishes. Furthermore, price gouging affects trust.
As one financial analyst told BBC News, “Consumers may not be able to keep stomaching price increases and so there is a risk they purchase less of the popular brands and/or trade down to cheaper options. The big brand companies therefore face the risk of having to cut their prices just to maintain sales volumes.”
For example, a very well-known fast food brand thought a promotional price that had been used for years for a multi-item meal would work again. Using research franchisees were surprised to learn that the brand’s meal promotion would only sell at a lower price. The brand had lost so much customer-perceived brand value that the original price point for the meal was too high; the brand was just not worth the pirce. Once the price for the meal was lowered, customers started purchasing the promoted meal. Not knowing in advance what price your brand can and cannot carry is a sin. The question is whether brand owners are assessing their brands’ ability to carry those heavier customer prices at retail.
Pricing strategy is critically important. Business sets the price, but customers set the value. Technology changes, talent availability, AI, financial and accounting software, supply chain and other issues are important. But, having the right pricing strategy reflecting the right customer-perceived value is very important as well. Without delivering value for customers, there will be little sustainable value for shareholders.
The way you set prices does not just influence demand. Pricing drives brand perceptions. Pricing is a wallet issue, but it is also a psychological issue. This is more than evident in the customer comments from The Wall Street Journal dealership pricing exposé. Making sure the brand’s price is right is critical. Organizations must know the answers for these five rules for in advance of raising prices:
- Understand how your brand is differentiated from its closest customer-defined competitor
- Understand the customer-perceived trustworthy brand value of this differentiation
- Understand customers’ willingness to pay
- Know what the price competitiveness is within the brand’s customer-defined segment
- Measure and track changes in price elasticity
Unless there is customer-perceived value there will not be shareholder value. To increase shareholder value, a brand must be the most efficient and productive provider of a branded offer that customers value. As The Wall Street Journal noted, those brands that have “weak” volumes are brands that “… are more likely to lose market share when they raise prices….” Some brands are already showing fewer sales. The interesting point is that the Wall Street Journal states “Investors will soon learn which brands consumers can and can’t live without.”
These are perilous times for brands. Do not let pricing be a mere tactic used to prop up margins. Make pricing a strategic variable for generating high quality revenue growth leading to enduring profitable growth.
