The combination of rising distribution and commodity costs means that marketers’ least favourite of the 4Ps, pricing, is likely to feature firmly on the agenda for the next year.
As inflation creeps up and consumer confidence wavers, manufacturers are seeking to mitigate these headwinds and retailers are trying to protect profits while avoiding losing shoppers to lower-priced stores. Throughout my career I’ve found marketers tend to shy away from pricing, so now seems the perfect moment to face the demons.
Despite the turmoil out there, it’s worth reminding ourselves why pricing is the marketer’s friend in delivering value for their organisation. Though many feel more comfortable focusing on communications, price is probably the most powerful lever a marketer has in enabling potential consumers to understand their proposition and convert that into sales.
We also forget that great marketing activity generates two key benefits. The first of these is ‘return on marketing investment’, which everyone focuses on – marketing’s ability to turn awareness into sales. We forget the other, equally important, benefit of great marketing: creating strong brands in consumers’ minds; brands with the kind of perceived value which translates into an ability to increase price, ideally ahead of inflation. Creating inelastic brands is one of the most important roles marketing plays and yet few marketers include elasticity as a KPI or success criteria.
The first key piece of advice for marketers anxious about pricing is to focus more on these longer-term strategic dimensions and less on the more volatile moment of choice, where so many other factors are at play. In fact, right now, those brands which continued to invest and build equity during the pandemic are those more likely to have fewer bumps in the road in the months ahead. Put simply, taking care of strategic pricing and value perceptions sets your brand up to win consistently at the shelf.
What pricing does for the business
A long-term approach to pricing starts with providing clarity for the organisation as to your strategic pricing aims. This is as simple as articulating (grounded in understanding of your consumer, category and competition) your desired pricing, indexed on the market and on key competitors. This enables everyone to be clear on how the brand communicates the right value proposition to potential consumers, as well as playing the role needed by the business.
With clarity on what pricing needs to do for the brand and business, it becomes easier to see how to achieve it. You’ll know which attributes and associations to build in the consumer’s mind, and how to balance headline pricing on core brand variants with attractive category positioning for other variants – thus maximising the opportunity to increase penetration among more consumers, on more buying occasions, profitably.
A holistic mindset around other revenue growth management tactics is fruitful – think pack price architecture, and consider shopper behaviour by channel. It’s no mistake that a 500ml bottle of Coke costs around £1.50 in a convenience store versus £2 for 2l in a grocery store. The pricing scales are even more extreme in luxury categories, where BMW model prices go from £25,000 to over £130,000.
Price is probably the most powerful lever a marketer has.
Once you are clear on how your marketing builds strong value perceptions in consumers’ minds, and services a broad range of their needs at relevant price points, it is much easier to see how to react and stay calm when category pricing is disrupted.
Get comfortable with pricing research and analytics. There are loads of approaches out there – from price elasticity modelling, to perceived value research, to Van Westendorp’s price sensitivity metre and so forth.
Often, marketers’ lack of confidence with pricing research manifests in charges of it being backward-looking or based on explicit questions around willingness to pay, which don’t reflect real purchasing situations. There are, of course, many more ‘implicit’ techniques available and ecommerce enables much more real-world price testing. However, the point is not to be literal about these tools but to use them creatively to explore different scenarios, and to get objective understanding of your brand’s power and likely consumer responses to different prices.
Alongside pricing research, behavioural economics has become increasingly valuable for marketers, in considering pricing less in terms of willingness to pay and more in terms of how context can influence price acceptance and buyer behaviour. Understanding what the category anchors are is important, as is how the mindset of buyers can affect their behaviour – from bargain hunting to avoiding risk, and so forth.
Lack of ownership
Marketers get nervous about pricing, as it’s one area where they are seldom the decision-maker; rather they’re someone who needs to influence internal and external decisions around pricing. I think it is this lack of perceived ownership which means marketers are often happy to leave pricing to colleagues in finance and sales.
Recognising that everyone in the organisation can play a role in pricing – including supply and R&D – can be liberating, however, as marketing so often excels in enabling cross functional collaboration. Get the most out of these distinct perspectives to enable scenario planning, grounded in the unique data sets we have as marketers and our ability to create stories that can influence decision makers.
When it comes to putting plans into action, understand the motivations and context of the retailer. It is fear which makes ‘pricing’ the least favourite P of marketers – but cut this down to size, as your customers and consumers can be navigating this situation with the same feelings of uncertainty.
Finally, be bold in taking action. When confronted with different options and ways forward, research shows that it is almost always best to opt for paths which bring about change versus taking refuge in the status quo.