With tariffs on imported goods and services, brands must realize their inherent customer-perceived brand value. Conversations reported in the business press describe situations where brands debate their ability to raise prices without lowering demand. Dynamic pricing is once again a consideration across brands aiming to implement what airlines and hotels implement. There is a raft of articles on what brand owners may or may not do to stay viable: raise prices, maintain prices, eat the costs, vary the costs across daypart, type of customer.
At the heart of the conversation is the fact that brand value is customer-perceived. Brands set prices. However, customers determine the value of brands at the set prices. Customer-perceived brand value relies on the delivery of the total brand experience (functional, emotional, social benefits) relative to the total brand cost (money, time, effort) multiplied by trust. You cannot compete on price alone. Price is not value. Price is a component of “total brand cost.” To win, a brand must be aware of what the brand stands for, the level of trust people imbue in the brand, and the costs relative to the experience received. When you deal with price alone, you are creating a commodity, attracting customers who are indifferent to brand and willing to consider any brand as long as it is a low price.
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If you read the Op Ed in the Wall Street Journal by George Gilder and Gale Pooley, you will understand that time is as (or more) precious than money. Time is a significant contributor to a brand’s cost. By focusing on money alone, a brand is doing itself an immense disservice. Time, effort, and money are the costs by which a customer or potential customer develops a brand’s relative, perceived value.
Continuing to believe that brand and brand management are all about image, communications, advertising, and apps is also major mismarketing. Please note: customer-perceived brand value affects share price.
For example, there was NUMMI. NUMMI was a joint manufacturing venture between General Motors and Toyota. Opened in 1984, NUMMI built Toyota Corollas and General Motors built Prizms as well as Chevy Geos and Novas. From an operational standpoint, there was a lot of positive learning. From a brand standpoint, the news was a disaster for GM. The Toyota Corollas and the Chevrolet Prizms were built side by side. Toyota designed both models and the differences in their components and trim were minor. Both vehicles received high marks from Consumer Reports. But, the GM-branded Prizm required significantly more in buyer incentives to support its sales.
The suggested retail price for the Toyota Corolla was $15,223. The suggested retail price for the Chevy Prizm was $16, 315. The net price for the Toyota Corolla was $14,973. The net price for the Chevy Prizm was $14,315. The net price difference was $658. The trade-in price for the Toyota Corolla was $11,417 while the trade-in price for the Chevy Prizm was $9,955. The difference was $1,482. Toyota sold 230,000 Corollas. Chevy sold 52,000 Prizms.
The profit differential, as reported in 1988 by The Journal of Brand Management, was: Toyota made $108M more than GM in operating profits, while Toyota dealers made $128M more than GM dealers
Nissan had a similar experience. In an interview with Bloomberg BusinessWeek immediately after his arrival at Nissan, Carlos Ghosn said that fixing the quality of Nissan vehicles was an imperative. And, incentives would need to be lowered or eliminated because the cost of incentives was a serious financial drag on profits. What did Mr. Ghosn learn? Nissan research showed that Nissans were at a significant price-value disadvantage relative to Toyota. The Nissan research used two identical Nissan vehicles. One Nissan vehicle carried a Toyota badge; the other vehicle kept its Nissan badge. Results indicated that customers would need at least $1000 in incentives to purchase the Nissan-badged vehicle instead of the Toyota-branded vehicle.
Brand has a huge effect on brand value. Brand is a financial asset affecting the bottom line.
Let’s return to price. Price is an important cost in the customer’s value equation. And, cost is one thing that marketers actually control.
In 1976, a Dutch economist, Peter van Westendorp developed a market research technique for determining customer price preferences. It was called PSM or Price Sensitivity Meter. Van Westendorp understood that people are quite able to intuit a price-value relationship. People inherently have an understanding of “pricing thresholds” whereby they perceive a price as too high, too low, high but acceptable and so forth.
What is remarkable about the PSM approach is just how simple it is in execution. The method consists of 4 questions:
- Too expensive: At what price would you consider product X to be so expensive that you would not consider buying it?
- Too cheap: At what price would you consider product X to be priced so low that you would feel the quality couldn’t be very good?
- Expensive/Acceptable: At what price would you consider product X starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it?
- Inexpensive/Good Bargain
For van Westendorp,
The Optimum Price: The intersection where an equal number of customers see the brand as “too cheap” and “too expensive”.
The Range of Acceptable Prices: The range of acceptable prices. Pricing outside this range will severely limit sales.
The Normal Price: the price that customers feel the product or service sells for or could sell for.
A Value Index: Divide the optimum price by the actual price and multiply by 100. The more the Value Index exceeds 100, the greater the willingness of the customer to pay more than the actual selling price for the product. And, so conversely, the more the Value Index falls below 100, the less likely customers are to pay the actual selling price.
The way you set prices does not just influence demand. Pricing drives brand-value perceptions. Research shows that if a price is too low, it can dangerously hurt a brand by impacting quality perceptions. Too many deals also have a detrimental effect on the brand. Pricing is a wallet issue. But, it is also a psychological issue. Making sure the brand’s price is right is critical. As the van Westendorp model demonstrates, setting prices does not have to be complex. Sometimes simplicity is the best approach. Nevertheless, what is your pricing strategy?
Brand value decisions need to be strategic. What is the customer-perceived fair value for your brand? How are your marketing efforts affecting customer-perceived value? Is price sensitivity increasing or decreasing? The world does not stand still. A brand may be offered at the same price that previously worked. But today, that same price is too high compared to the competition. Your brand may not be able to sustain a price today that was considered fair and reasonable in the past. Why? Is it the marketing? Are there changes in quality perception? Is it the evolution of the competitive environment?. Or the brand may have stood still while alternative brands have improved and evolved, raising customer expectations. Excessive emphasis on price incentives may severely damage brand loyalty and brand value.
As the Trump tariffs begin to have a pricing effect, here are seven things brands can do when it comes to pricing strategy:
- Understand how your brand is differentiated from its closest customer-defined competitor.
- Understand the customer-perceived 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.
- Build brand loyalty. Loyal customers are willing to pay higher prices, but up to a point.
- Know the indifference point where the customer believes the price is too high and becomes brand indifferent.
Contributed to Branding Strategy Insider by: Joan Kiddon, Partner, The Blake Project, Author of The Paradox Planet: Creating Brand Experiences For The Age Of I
At The Blake Project, we help clients worldwide, in all stages of development, define or redefine and articulate what makes them competitive at pivotal moments of change. This includes pricing strategies that propel their businesses and brands forward. Please email us to learn how we can help you compete differently.
Branding Strategy Insider is a service of The Blake Project: A strategic brand consultancy specializing in Brand Research, Brand Strategy, Brand Growth and Brand Education
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