There is a clear link between brand building activity and the ability of companies to raise their prices – but it requires creative advertising and changes to budgets, according to Adam&eveDDB group head of effectiveness Les Binet.
“Long-term brand building is the key to firmer pricing,” he said, arguing that creative advertising is one of three vital ingredients to achieve long-term brand goals on strong prices.
Speaking at Kantar’s Ignite 2023 event, Binet outlined how rising inflation and interest rates have put an end to the “era of free money”, and placed new demands on companies to deliver profits.
When inflation was at consistently low levels for years, many businesses and investors were happy to defer their profits until a later date, Binet said. “People didn’t care about immediate profit and they didn’t move their prices very often. Now, in a world where prices are volatile, where inflation is high and where investors want profits now, you have to think about this metric, you have to measure this metric and you have to try to control this metric.”
To this end, marketers must reacquaint themselves with price, which he believes had become the most neglected of the 4Ps of marketing. In particular, Binet said that price elasticity – the extent to which a change in price impacts demand for a product – is widely misunderstood.
In simple terms, if a 1% increase in price results in a volume decrease of 1%, then a company has a price elasticity of one; if a 1% price increase results in a volume decrease of 2%, then the company has a price elasticity factor of two, and so on. It is the ratio of the volume movement compared to the price movement.
Companies with a low score for price elasticity are in a good position to raise prices, as this will cause a relatively small drop in volume sales and achieve a profit increase simply by charging more. This requires companies to support their pricing and to resist the temptation to buoy sales with promotions that eat away at profit, Binet said, noting that “the really big increases in profit come from brands that manage to increase both price and volume at the same time”.
In Binet’s view the key to achieving this goal is using the correct mix of long-term branding and sales activation for the task, something he and Peter Field outline in their book The Long and the Short of it.
“Crucially, brand building not only generates volume but it also supports price, by reducing price elasticity,” said Binet. “Long-term brand building is the key to firmer pricing.”
There are no examples, Binet said, of short-term activation campaigns lowering the price sensitivity of a brand – and price-led promotions can often have the opposite effect. However, the latest research from Kantar supports the hypothesis that strong brand building leads to stronger pricing and stronger profit, he added.
The strategy requires a commitment for brands to spend money. “For premium brands, if you are going to pursue a price strategy, you need to spend more. It’s expensive. You also need a different mix of brand and activation,” said Binet. Rather than the traditional 60:40 mix in favour of long-term brand building, premium brands may need to shift closer to 70:30, he said.
How to successfully raise prices
Beyond budget, Binet identifies three ingredients required for companies to succeed in raising prices without losing sales volume.
First among these is reach. Binet said more than 2,000 case studies have failed to identify companies that have strengthened their pricing power by targeting existing customers.
“CRM, all that stuff, is absolutely useless when it comes to trying to firm up your pricing,” he said. “It’s more about acquisition, and more importantly reach.” Campaigns that reach wide audiences are more beneficial than tightly targeted messages when tackling this challenge, Binet insisted.
The second ingredient is emotion. “It’s not about telling people things,” Binet said, asserting that it is not possible to convince customers to pay more for a product by rational argument.
“Getting people to pay more for the same old shit is not a rational thing. It’s emotional. The key to pricing power is to get people to feel strongly about your brand, to disengage the rational and make people want the thing at any price,” he said.
The stronger the effect on brand metrics like mental availability and positivity towards the brand, the more likely you are to reduce price sensitivity.
The third ingredient is fame: “Campaigns that consciously aim to make the brand and its marketing famous are much, much better at reducing price sensitivity and supporting premium prices than any other kind of marketing.”
The easiest way to fame is creativity. “Highly creative advertising is much better at getting an emotional response and is much more likely to generate fame,” said Binet. The “kind of ads that win at Cannes” are more likely to get fame than a more rational, measured approach, he added.
“The stronger the effect on brand metrics like mental availability and positivity towards the brand, the more likely you are to reduce price sensitivity,” he said.
Binet demonstrated his theory with a case study of cat food brand Felix, which in 1989 was on the verge of being delisted from a number of supermarkets. “It hadn’t been advertised for decades, it was dying,” said Binet.
A campaign that repackaged the product and introduced a cute cat brand mascot – but which featured virtually no product information – ensued. “All we said was ‘Cats like Felix like Felix,” recalled Binet. Over several years the brand went from a market share of 5% to leading the category, based on the famous antics of a cartoon cat.
Alongside the increase in sales volumes, Felix managed to decrease its price elasticity measure, allowing it to increase its prices. “Not only were they quintupling the volume, but they went from being one of the cheapest brands to being one of the most expensive ,” concluded Binet.