From all my years in research and consulting, I think I’ve learned a thing or two about marketing worth sharing. Enduring fundamentals, mostly yet often overlooked. So, this year, I’m sharing some for your consideration. I hope they’re helpful.
This week’s thought: Price is the most important P.
When E. Jermone McCarthy first articulated the “Four Ps” in his 1960 textbook as the best way to organize a managerial approach to marketing, he put primary emphasis on product. After which came the right place to get the product to consumers and, next, the right promotion to communicate it. Only then did decisions about price come into the mix — which were the right price to move the right product at the right place with the right promotion.
Philip Kotler mainstreamed McCarthy’s Four Ps by adopting it as the heuristic framework taught in his highly influential marketing textbook, first published in 1967 and still in widespread use 16 editions later. Generations of business leaders have managed brands according to McCarthy’s Four Ps framework, which prioritizes marketing decisions, which is all well and good. Except that by putting price at the end of the line, McCarthy, no doubt unintentionally, nudged marketing in a direction that over the years has given short shrift to the most important P.
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Not that price has been ignored, of course. However, price is rarely included as a key part of the marketing strategy. More often than not, it is considered tactical and final decisions about pricing are frequently made by sales (in negotiations with retailers) or finance. The marketing upside from strategic pricing is lost.
To begin with, price generates revenue and creates margin. Although this is obvious, it is essential to note that it determines marketing objectives. An annual revenue goal of $300 million in sales at a $1 price tag requires selling 300 million units. At a $1.50 price tag, it’s 200 million units. This difference in unit volume is not inconsequential. Everything about a marketing campaign flows from the number of units to be sold.
Price will affect the likelihood of purchasing. So, a $1.50 price tag might weigh on consumer interest and purchasing decisions to such a degree that sales would drop below 200 million units. This is a question of elasticity. Sometimes a brand can raise its price without any impact on sales. But few brands enjoy completely inelastic demand.
Most of the time, a higher price will diminish sales. However, if $1.50 price tag only dropped demand from 300 million units to 250 million units, not 200 million, total revenue would be $375 million, well above the annual revenue goal.
Moreover, higher prices for inelastic brands build margins, which creates more opportunities to invest in marketing and brand-building. Most of the time, marketing budgets are benchmarked relative to return. Some companies budget by a percentage of sales. Smart companies do so by the percentage margin—that’s the better measure of the power of brand storytelling.
This simple example illustrates why price is the most important P. Despite the best product, place and promotion, a wrong price will override everything else. Whereas wrong decisions about the other Ps can generally be better weathered.
Products can find a niche even with me-too positioning or less than perfect performance. New Coke actually boosted sales. Shortfalls in place and promotion will handicap brands but are almost never fatal. Following its failed logo redesign, Cracker Barrel’s revenue is likely to fall short of growth expectations but will still be roughly in line with the prior two years.
The best way to think about price is that it signals value to consumers. It is a cognitive cue. The value it connotes may or may not resonate, but that is what consumers take away. And it’s always in relative terms. There is no such thing as price in the absolute.
Consumers encounter price in context. They know if it is higher or lower than competition and higher or lower than the past. They know whether inflation is pushing prices up. They know how much a given price will get them. They know what sorts of people can afford certain prices. They have some experience, directly themselves or indirectly from others, with the quality and performance of various products. They may even know whether the prices they pay will go to support the politics of management or to promote sustainability or to underwrite philanthropic endeavors. Tesla or Patagonia or Hershey, people know where their money goes.
Context sets the parameters of value. Consumers understand the value associated with price relative to the benchmark of context. But value perceptions are not fixed. The context can shift, putting brands in better or worse positions, usually worse. Or brands can change perceptions by shifting position within the market context.
If a brand raises price without any change in quality or performance, value perceptions will usually suffer. But it could be that a brand is not charging as much as its quality or performance gives it permission to do, in which case a brand has room to charge more. The elasticity of demand is determined by the fit of price, relative to context, with what a brand is perceived to deliver.
This is strategic. Price is connected directly with a brand’s value proposition. Strategic product dimensions are signaled to consumers by price. Price is a form of communications or promotion. Price can be reinforced or eroded depending on place. All of which means that marketers can bolster contextual perceptions of price through the other Ps. The Four Ps are tied together in a nexus of value that centers on price and what it says to consumers.
There has been debate lately about the power of brands to mold and shape value perceptions to support higher prices. The objection is that consumers are not so gullible that they will pay more just because of brand perceptions. Which is an objection that betrays a startling degree of ignorance about the power of narrative storytelling.
Brand positioning is the story told about the relevance and uniqueness of a brand’s solution to a consumer problem. Or to say it another way, positioning is the meaningful difference of a brand. Brands are in the storytelling business. Well-managed brands are built on a narrative that resonates imaginatively and emotionally. It becomes the so-called truth about a brand.
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Narrative truths tend to be impervious to the facts. As I have often said, narrative trumps data every time. If you want to change people’s minds, you need a better story not a litany of contrary facts. People bend the facts to fit their stories.
This is nothing new. Social psychology has demonstrated time and again the malleability of perceptions regardless of the facts. This body of research is probably best summarized in the all-time best-selling book about persuasion, and a must-read for marketers in my opinion, Robert Cialdini’s Influence, now in its fifth edition since its original publication in 1984.
Brand stories matter. Price is the signal. The best way to manage price is to build a brand story that has more value in context. The worst way to manage price is to ignore the brand story and send the wrong signal relative to value expectations.
The story that is built with product, place, and promotion is signaled by price. The price is too high when the brand story doesn’t support it. The price is too low when the brand story boosts perceptions. Narratives have this power.
All that said, there is a nuance, which is convenience. As I have written before, “Convenience Rules The Day”, consumers will pay more for convenience and will pass on a cheaper product if it is less convenient. But this is all part of the value equation signaled by price. Convenience can often dominate a brand’s narrative, but it is that narrative that determines the perceptions of price that make it most important P.
Contributed to Branding Strategy Insider By Walker Smith, Chief Knowledge Officer, Brand & Marketing at Kantar
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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