For about five years, until about a year ago, ‘purpose thinking’ was one of the hottest thought leadership concepts, promoted at every marketing and management seminar. Today, it is at risk of being simply forgotten about, or at least “postponed until after the recession”, as you sometimes hear in boardrooms.
Back in February, I predicted inflation would separate the strong brands from the weak. Paraphrasing the famous Warren Buffet quote, I argued that while purpose thinking gets you in the right water, pricing power is your swimsuit – to avoid being caught naked when the tide goes out.
Pricing power is a powerful concept that is still not as well understood by marketers as it should be. As Buffet has defined it for decades, pricing power is “the ability to systematically raise prices without curtailing demand or losing share to a competitor”. It is his number-one criterion for investing in companies.
Marketing Week’s recent Language of Effectiveness survey indicated again that the idea of pricing power is still largely absent in how marketers communicate with their CEO and boards on the ‘why’ of marketing investment.
As a former global CMO, as a current investor and board member of public and private companies, and as a board advisor who has been deeply immersed in these discussions for a decade, I recommend pricing power as the best way to explain marketing effectiveness to internal and external financial stakeholders. Companies that do have reaped the benefits.
I never advise senior marketers to forget about their own well-honed functional language (serving unmet or underserved needs and wants, creating demand, etc), nor to deny the potential use of the range of effectiveness metrics that go with it. However, I do implore them to actively address a hard truth once and for all: most marketing language is perceived as voodoo for many internal and external finance stakeholders.
They are only interested in the outcome of the marketing work, in other words its impact on the P&L (top- and bottom-line growth) and balance sheet (creating intangible asset value); not in the dizzying array of input or output metrics with which marketers bamboozle them.
Pricing power is new financial literacy language marketers need to adopt fast, at least if they want to be taken seriously by their largely underserved financial stakeholders. The more CMOs, CFOs and CEOs can align on the concept of how to create and measure sustainable pricing power, the more they will close what academics have come to call ‘the (stubborn) managerial marketing-finance gap’. As a result, more CMOs will get a seat at the exco table and more CMOs may access boards positions over time. Research from the Darden School of Business at the University of Virginia has shown less than 2.6% of boards have marketers on them. Why do you think this is? These are, in the end, the people signing off on the CEO strategy and budget proposals.
Many – still not all, surprisingly – boards and CEOs now realise they should have been smarter before in terms of brand building.
Pricing is tangible. Pricing power is hard data that trumps the fuzzy ROI discussion and any other marketing metric to convey the impact of marketing. It is the language of money that the CFO, CEO and board want to understand. Pricing drives top line. Investing in brand health today means pricing power tomorrow.
The best marketing companies are the ones that never waver on brand building. They invest consistently, both in good times and in recessionary times. The key benefit lies in boring consistency, not in flashy brand relaunches that make for good media stories (and make or break marketing careers). They systematically build sustainable pricing power over years, and they monetise this effort on a continuous basis. The recent inflation spike becomes a moment they diligently prepared for. Not a crisis. Inflation is an acid test for a company’s true marketing capability excellence.
Purpose and ESG under pressure
The tide has indeed gone out, and plenty of brand owners do stand naked. With rampant inflation, senior leadership teams are scrambling to protect margins. The focus is on survival, regardless of the recent sensational announcements by purpose-driven icons like Patagonia’s owner and CEO Yvon Chouinard.
He is heralded by many disciples as a true champion of the cause to reinvent capitalism. However, the hard reality is that, in many boardrooms and senior leadership committees, any thinking about purpose is simply being pushed onto the backburner.
Many – still not all, surprisingly – boards and CEOs now realise they should have been smarter before in terms of brand building. One can only hope that the hard lesson will be immediately applied moving forward. Yet I am not holding my breath. The proof will be in the ongoing 2022 budget rejigging, and in the 2023 planning rounds.
Managerial instinct will be to ‘focus on the basics’, a veiled proxy for the short term, and on saving careers. As per the German saying by Berthold Brecht: “Erst kommt das Fressen, dann die Moral.” First comes food, then comes morality. It is a very understandable human reflex in crisis, albeit unlikely to guide us through the dilemma at hand.
Equally, ESG (environmental, social and governance) ratings, often used by stakeholders as a proxy for how purpose-driven a company might be, are under fire, their credibility increasingly compromised. There are three key reasons behind it.
Firstly, ESG ratings are still misunderstood by managers, boards and investors. The rating is marketed to them as a predictive proxy for the ethics and morals underpinning a company’s future growth; an assessment of how a company might translate oft lofty purpose statements in numbers Wall Street could understand and act on.
Naturally, boards came to see it as a proxy for doing good, as opposed to what it truly is: a rating measuring the impact of a specific sub-set of risks to the company’s long-term value creation potential.
The pendulum may be swinging too much away from stakeholder-centric purpose, and back to shareholder short-termism.
As an example, an ESG rating does not measure the impact on the planet of how hard a company works to help save it. On the contrary, it measures the possible current and future impact on the P&L and balance sheet of climate change. Just imagine the exposure to a lack of water for many industries in the summer we just lived through.
For most CFOs, though, the key benefit to fighting for a high ESG rating was always crystal clear: the lower the ESG risk, the lower the interest on any bank loans. Not unlike getting a better credit rating. They don’t mind if the banks will claim they lend to companies who do good, perpetuating the overall misconception of what an ESG rating really measures.
The second issue for ESG is the absence of clear standards of how and what it exactly measures. ESG ratings started to be offered as a service by the likes of MSCI, Bloomberg and Thomson Reuters around the year 2000. According to ERM Group’s SustainAbility Institute, by 2018 there were already over 600 different ESG ratings marketed. However, unlike with credit ratings, academic research (such as from MIT in 2019) has consistently shown a very high statistical dispersion among different providers’ ratings of the same companies.
In simple terms, the same company would get a similar credit rating from the few credit rating agencies, as they all apply relatively similar algorithms. However, in ESG land, companies are likely to get very different ratings, dependent who they got it from, as the respective methodologies are very different. The range is so wide that ratings may even be completely opposite. For example, my former company AB InBev is rated mid/low on ESG by S&P Global, mid/high by Refinitiv and Sustainalytics, and very high by MSCI. The range of ratings on a company like Volkswagen is even wider. Who should investors believe? Who will stakeholders (want to) believe?
The third key issue on ESG is their actual tangible impact for investors (in terms of returns) as well as for society at large (through lowering carbon emissions or reducing income equality, for example).
Bloomberg Intelligence estimates that ESG-rated funds will represent $50tn by 2025, or one third of all assets under management. How do these funds and their investments perform so far? A recent Wall Street Journal article highlighted academic research (from UCLA, NYU Stern, etc) comparing value creation by firms with high and low ESG scores. It proved that a high score is not necessarily a predictor of higher growth and profits, contrary to advertising claims made by the ESG rating agencies and by the funds touting them.
Moreover, it said: “Over the past five years, global ESG rated funds have underperformed the broader market by more than 250 basis points per year, an average 6.3% return compared with an 8.9% return.”
Many of us might consider a 6.3% return as not too shabby at all. The so-called impact investors, especially, who elected to invest in these ESG-rated funds, might live with that. Behavioural finance theory would suggest they might see the forgone extra return as acceptable, if it did any good for mankind.
Alas, no. More academic research (Utah, Miami and Hong Kong) found that at least so far there is “no evidence that socially responsible investment funds improve corporate behaviour”. The WSJ article concluded with a series of possible improvements to make ESG more useful and credible again.
But is all the above reason enough to jettison all the good that purpose thinking and the still maturing ESG rating frameworks have brought us over the last decades? We are at risk of throwing away the proverbial baby with the bathwater. The pendulum may be swinging too much away from stakeholder-centric purpose, and back to shareholder short-termism.
The ‘Tyranny of the OR’
The strongest brands have always been, and will always be, the ones that create sustainable pricing power. Sustainability built on purpose. As I argued in my February Marketing Week article, the two are inextricably linked. Where purpose and pricing power are concerned, the decision is ‘and’, not ‘or’. Allow me to deepen the argument here.
Management literature and practice always reminds us that strategy is about making hard choices. It is an ‘or’, not an ‘and’; a deliberate choice between a set of options to reach an objective or goal. In a way, strategic decisions are not unlike marriage decisions. Some of you will correctly argue that many marriages historically were arranged purely for strategic non-love reasons. These days some still are. However, luckily, in most cases both sides have been able to pick the true love of their life, and they (try to) stick to that choice to be happy forever after. Marriage is in essence an ‘or’ decision, at least in principle.
In his 1994 bestseller Built to Last, management guru Jim Collins introduced the concept of the “Tyranny of the OR,” which “pushes people to believe that things must be either A OR B, but not both”. Instead of feeling oppressed by this, he argued that highly visionary companies liberate themselves with the “Genius of the AND”, the ability to embrace extremes of dimensions at the same time.
Effective brand management is such an eternal high-wire act between extremes: building long-term brand assets as cost-efficiently as possible, and intelligently monetizing that asset value short-term. What Americans call ‘to walk and chew gum’. Untapped equity reserves in the consumer or B2B customer mind should get translated ASAP into real P&L added value, by bringing real market prices over time as close as possible to their willingness to pay (WTP). By leveraging earned pricing power.
While many strategic choices mean ‘or’, in this case the hard choice is ‘and’.
Of course, if a company was only focused on the short term in the past, and it has not built or nurtured any/enough WTP in the mind of consumers or customers, that is the first bullet to bite. The hard decision is to invest more to create WTP. There is no panacea. There will be short-term margin pain. Company leadership will pay for the sins of its past.
Wall Street calls this over-earning: creating performance that was better than it deserved to be. Note: short-term investors happily took that result and ran with it. But the music always stops one day. Inflation made the music stop.
Because of inflation, boards and executive leadership should by now have understood that (painful) reinvestment, with a long-range plan and new narrative to stakeholders, is really the only correct and viable option. If they insist on short-term only, as per the natural reflex mentioned above, value investors should take their money out now.
Both willingness to pay and willingness to sell drive margins
There is another, often overlooked, ‘hidden turbo’ side to pricing power that CMOs might want to make their CFOs and CEOs aware of, visualised in the simple yet powerful concept of the ‘value stick’, created by Harvard professor Felix Oberholzer-Gee in his 2021 book Better, Simpler Strategy.
Creating WTP is the top-line concept marketers rightfully (and uniquely) should continue to focus on. However, now look at the bottom of the value stick. Companies can also grow margin by lowering costs. Not just by smartly cutting costs in the classic sense, but by elegantly leveraging pricing power to further lower what Oberholzer-Gee calls ‘willingness to sell’ (WTS) – the lowest price a company can accept for a product or service.
Intuitively, one can see how a company with aspirational, strong brands – ie brands with sustainable pricing power – gains a number of hidden WTS benefits that can put a turbo on the full margin, including (but not limited to) the below:
- Employees: may join and stay longer at lower cost
- Debt: banks may offer lower interest cost for lower risk
- Equity: investors may pay more for your shares
- Suppliers: may accept better payment terms to get you as a client
- Customers: may accept you as a reference supplier at lower cost
- Regulators: may accept lower risk-mitigation cost
There is one more interesting dimension to this hidden turbo. Mark Ritson has rightfully questioned the one-dimensional worship of purpose in various Marketing Week articles since last year, highlighting recently that much of the self-serving research on the impact of purpose needs to be taken with a grain of salt. Still, Oberholzer’s research suggests it pays to be stakeholder-focused.
His book suggests the potential WTP is higher for a stakeholder-focused corporation, while its potential WTS can be significantly lower. Hence, the margin potential of a company focused on building brands with sustainable pricing power is higher than that of a company only focused on short-term shareholder value.
Close your eyes and picture a company you personally would never work for, versus a purpose-driven company you love (maybe Patagonia?). How much would each have to pay you to earn your soul? Which company benefits from the lower WTS? It makes intuitive sense. It all goes back to the sustainability of your brand.
Think also about the ethics of pricing power. It is not because you can increase prices, or can lower WTS, that you should. Energy monopolies are now accused of abusing their monopoly pricing power. Their shareholders will love the gains and may not care. But the board should, as in the end reputations matter. Governments rightfully will come and tax the super-earnings (or at least say they will). Greece has already shown its EU colleagues it is possible.
Amazon Prime increased its yearly subscription in the US by 17%, from $119 to $139 in the last year, compared to about 7-10% inflation. Given its pricing power, the brand probably can. It worked hard for that privilege. The brand invests a lot in superior customer service (CX) and has earned our trust.
The strategic question for the Amazon leadership is about stakeholder versus shareholder. Consumer empathy in tough times. How much does Amazon, a self-proclaimed (and proven) CX champion, really feel the pain of its shoppers?
What if the board and CEO had said: “We know you are experiencing tough times, so we’ll postpone our price increase?” What would it have done for the reputation and long-term gains in WTP and WTS, especially for a company that needs to attract so much talent to keep growing?
The ‘Genius of the AND’
While many strategic choices mean ‘or’, in this case the hard choice is ‘and’. Being purpose-driven remains the necessary condition for success, while investing in building pricing power is the sufficient one. Marketers need to invest much more time with their underserved internal and external finance stakeholders. It is all about language. Main Street needs to learn to speak better Wall Street, and vice versa. Ignoring each other is bad for both sides.
The value stick may be a valuable practical tool to help you visualise the idea of pricing power inside your company. However, nobody gets their margins handed to them just like that. Creating higher WTP or lower WTS is the first hard choice to make. Monetising it requires daily operational excellence. Companies need to negotiate hard and smart to get this done. A very focused organisation is necessary to translate potential WTP and WTS into actual margin. That requires a very close collaboration between marketing, finance, and sales.
It is all about balanced growth. It is about purpose and pricing power. Sustainable pricing power.
Chris Burggraeve is the founder of Vicomte, former global CMO of AB InBev, and former president of the World Federation of Advertisers. Find more information on his books on the topic of marketing-finance collaboration on Linkedin or www.vicomte.com