Inflation will separate the strong marketing companies from the weak

Marketers have long lost sight of the fourth P of the marketing mix, but they will need to reassert control over pricing if their brands are to stand up to the pressures of inflation.

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Marketers have never operated in what Robin Hogarth, an eminent decision-making psychologist, described as a “kind” world. A world that is well defined, with clearly understood rules and patterns, like sports.

Marketers instead operate in a “wicked” world, with unclear rules, ever more ambiguous and noisy feedback loops and deceiving repetitive patterns.

Digitalisation and globalisation have made this world even riskier over the past two decades. And now, as if Covid-19 wasn’t enough, marketers have been awarded an extra headache: inflation.

Inflation is back, with a vengeance. With a few exceptions around the world, inflation of this level hasn’t been seen since pre-internet days. Few millennial or Gen Z marketers will ever have dealt with it in their marketing decision making.

For the few Boomer marketers still around (including myself), inflation today is a very unwelcome blast from the 70s and 80s. It was tough to handle then, and it will be even tougher to handle in today’s exponentially wicked world.

Brand equity, which underpins willingness to pay and hence pricing power, is built over time. Not by an overnight miracle, but by sustained investment.

Cynics might suggest that over the last decade or so, marketers have been having a great time saving the world instead. Purpose has been all that has mattered at every seminar and conference, and Main Street (marketing) has not thought about Wall Street (finance) for quite some time.

Only a few marketers have bothered to connect regularly with their internal finance peers, let alone try to understand what matters most to external investors when they value your company (hint: the robustness of your future earnings). Pricing, Kotler’s critical fourth P of the marketing mix, is an area marketing ceded over to sales long ago.

But now we have to return to the basics. Inflation forces all companies, brand-based or not, to reassess the strength of their business models. How can a business maintain profitability in the wake of spiralling costs? Are our brands strong enough to convince customers and consumers to pay not just a higher price, but one high enough to at least offset spiking inflation without losing volume?

C-suites and boardrooms have been agonising over inflation and pricing assumptions for 2022 and beyond since last summer. Many have realised their brands might not be able to support the required jumps in pricing. Budgets for 2022 will be reviewed again in a few months, as inflation proves higher than many boards ever wanted to accept at the end of 2021.

Inflation is an acid test for how excellent a company really is in terms of marketing. As the famous Warren Buffet quote goes: “Only when the tide goes out, do you discover who was swimming naked.”The 2022 Agenda: Making prices work

Years of underinvestment in brand equity will come home to roost, and there will be a price to pay for the marketing myopia sins of the past. Marketers may have warned their CFO and CEO for years that you can only milk a brand for so long, but the bonuses of the past have been paid and people have moved on.

Financial analysts may do a post-mortem and conclude the company was over-earning in the past (even if they did not see it at the time or conveniently overlooked it). But we are where we are.

Ignorance is not bliss

So, could marketing please fix this? Preferably creatively, at low or no cost? And like…now?

When an external shock occurs, company leaders and investors suddenly rediscover a simple truth they conveniently ignored in the past. Brand equity, which underpins willingness to pay and hence pricing power, is built over time. Not by an overnight miracle, but by sustained investment, and by leveraging a marketing capability built across the entire company over years.

Miracles only happen in some religions and in movies. Main Street and Wall Street have ignored each other for too long, and ignorance is not bliss for either party. Academia calls this the stubborn “managerial marketing-finance gap”.

To support marketers in their contribution potential, I decided five years ago that my own professional purpose would be to find structural solutions to close this gap. That decision resulted in two books: ‘Marketing is Finance is Business’ in 2018, and ‘Marketing is Not a Black Hole’ in 2021.

Built on the battle scars of expert marketing and finance operators over more than three decades, underpinned with academic rigour from the best global faculty specialising in the marketing-finance interface, the books provide Main Street and Wall Street with the world’s first ever marketing excellence rating model, called Alpha M.

Ensure you understand how pricing works in your company. Ensure you sit at the table where pricing decisions are made. Ensure they reflect the relative strength of the brand today.

Its intent is to increase a company’s chances of winning in this wicked world, by increasing the probability of sustainable top line growth. For investors, it will significantly reduce buyers’ remorse.

Companies like Cartamundi, a global leader in entertainment, have adopted this framework already, and they are discovering its transformational benefits. Maastricht University in the Netherlands, a global pioneer in cross-fertilising marketing and finance teaching, expects to open the world’s first ‘Marketing Finance Exchange (MFX) Centre of Excellence’ later this year, taking Alpha M further.

At the model’s core is defining the relative strength of your brand(s) in a simple way that both marketing and finance can intuitively and tangibly see, feel and track together. In Wall Street terms, a brand’s real earning potential is based on the net present value (NPV) of its future cashflows, potentially supplemented with a terminal value in the case of an M&A transaction.

The more a brand can demonstrate sustainable pricing power underpinning these cash flows, the stronger it will be perceived. Pricing power is defined as the ability of a brand to systematically raise its prices at or above inflation (CPI) over time, as a reflection of its growing brand equity, at constant or growing volume.

Building pricing power

The ability to raise price depends on several factors: your company’s relative competitive set, on industry regulation, and in particular, how sticky you have made your brand over time with your consumers.

Public and private monopolies have it the easiest by design. Look at your utility bills going up in double or triple digits, or at your Amazon Prime annual subscription going up nearly 17% if you’re in the US.

Having built in a perception of high switching costs helps too. Think of the small entrepreneur with a Quickbooks subscription. Switching accounting software is not done lightly when they raise monthly prices, though they may smartly offer a cheaper, fewer frills version to retain your business longer (and profitably).

The ‘big tech’ ecosystems have almost walled you in. Banks and telcos? Easier to switch with number portability, but still a hassle. In many areas, options are limited, and the few alternatives may raise prices as well anyway, so why bother?

Within our capitalist construct, it is hard for companies not to strive to become “indispensable”, and to derive pricing power from that. The more free choice as a consumer or customer, the tougher it gets for the company. Netflix may be a global juggernaut, but it is likely much more price elastic given all the other entertainment alternatives.

Every consumer packaged goods (CPG) company out there needs to fight for every inch of pricing. Even if they can prove consumers have a higher willingness to pay, convincing retailers is often a bare-knuckle fight, and one that requires top-notch collaboration and trust between marketing, sales, and finance.

Unique brands like the Biscoff “airline cookie” from Lotus Bakeries may have slightly easier retail talks than your average detergent, but nobody gets a red carpet.

It all starts with companies rediscovering the P of pricing today, and especially the drivers of pricing power tomorrow. For senior marketers, this is really the time to take back control. Ensure you understand how pricing works in your company. Ensure you sit at the table where pricing decisions are made. Ensure they reflect the relative strength of the brand today. Bring in some realism about what is possible and what is not. Build over time as needed.

CFOs, CEOs and boards may not like it at first, but it is their fiduciary duty to invest in the marketing capability that drives pricing power over time.

What about the critical word “sustainable”? Between 2008 and 2013, I was a board member and president of the World Federation of Advertisers (WFA). Since its inception in the 50s, the WFA’s mandate has been to make marketers as effective and efficient as possible.

Over the years, however, it also started having a number of intense conversations with regulators. The WFA became the strongest advocate for industry self-regulation, to avoid over-regulation. In 2013, the WFA officially evolved its purpose to reflect this duality – to help marketers earn, then re-earn, their social license to operate, and to help them become the best technical marketer they can be.Kimberly-Clark to support price rises with increased marketing spend

Mathematicians would say a business’s purpose is the necessary condition for success, but pricing power is the sufficient one. To have transformational impact for all stakeholders, both are at the core of how marketing contributes towards society. Sometimes hard choices mean “or”. In this case, the hard choice is “and”.

Companies that can prove they have sustainable pricing power will receive high marks from the investment community. In an update to investors following the release of The Hershey Company’s full year financial report earlier this month, Michael Lavery, a Piper Sandler senior research analyst, wrote in his first line: “We continue to believe Hershey is well-positioned given its price power, which we estimate is among the best in our large cap food coverage.”

The next day, Lavery issued a formal ‘overweight’ rating for the business. On the flipside, those who cannot prove pricing power may see a ‘neutral’ or ‘sell’ rating. Whenever investors see that, they run for the door.

Both Wall Street and Main Street have notoriously short memories, so maybe just remember this: the Alpha M model argues that purpose remains essential as you enter the water, but pricing power is your swimsuit.

Hopefully next time an inflation tsunami hits and the tide goes out, fewer might be swimming naked.

Chris Burggraeve is the founder of consultancy Vicomte, former global CMO of AB InBev, and former president of the World Federation of Advertisers (WFA). More information on his books can be found on Linkedin or his website.

Marketing Week is looking at what marketing’s opportunity is to lead and how to realise it in a series called ‘The Power to Transform’. The Festival of Marketing’s Transform event in March will provide further insight into how to realise marketing’s potential.

The Power to Transform


The 2022 Agenda: Making prices work

Michaela Jefferson

As we look ahead to 2022, Marketing Week has identified the key opportunities and challenges that will shape marketers’ roles. We are flagging what we think you should be spending your time and money on – and why, but equally it is a commitment from us to focus on these topics next year.