Optimising price is the “number one” priority for marketers in the current inflation crisis, according to Adam&eveDDB group head of effectiveness Les Binet.
Outlining the “whiplash” effects of the past two years – from Covid and supply chain disruption, to rising inequality and the first war in Europe for 30 years – Binet urged marketers to put the coming recession to one side and make tackling inflation their mission.
“The primary marketing problem is pricing. We need to optimise our prices and it’s fair to say price has been neglected as a marketing lever in the last couple of decades,” he explained yesterday (1 December) on an IPA webinar.
“Inflation rates have been so low that marketers have forgotten of the four Ps – product, place, price and promotion – price is the one you need to get right to make all the others work. If you don’t get your prices right, you don’t make money. Optimising your prices in this turbulent world is priority number one and to do that you need to understand supply and demand in your sector.”
Binet insisted all marketers start thinking like economists and focus on “hard business” in order to survive the coming months.
“If you’re the kind of marketer that thinks in terms of brand archetypes – or marketing horoscopes as I like to call them – and brand purpose and fluffy flim flam, that’s not going to help. Marketing has to be rooted in hard economics and business sense,” he argued.
“So much of what passes for advertising thinking is fluffy nonsense and has been over the last few years as we’ve been living in this golden time where we’ve had low inflation and money was free, which has now come to an end. We need to start thinking like business people again.”
This, Binet explained, means hiring people with a different set of skills, from a mathematical or economics background for example, who pay attention to “hard business data”. The economic reality will require marketers to get comfortable with using Excel and robust econometric modelling.
“It’s root and branch. It means gathering and keeping long-term sales data and paying attention to it. It means the marketing function needs to talk to the sales function and they all need to talk to the CFO and the CEO, and they all need to talk like grown-ups,” he added.
Focus on price elasticity
Given the reality of dealing with inflation, Binet suggested marketers should start by measuring price elasticity, using econometric modelling to “disentangle price” and analyse the true impact of promotions.
The easiest part of the pricing strategy to tweak in the short term, Binet noted, is the promotional budget. He argued price promotions are just price cuts in disguise and a superficial evaluation often masks their incremental impact.
“When you look at the econometric models you find a high proportion of what appears to be promoted volume is simply subsidised volume. Sales you would have made anyway, but you make them at a lower price. That’s just money down the drain,” Binet noted.
“Then a certain proportion of your sales are time-shifted. You would have sold the product anyway, but you would have sold it next week, in two weeks’ time or two months’ time, rather than today. So, sales brought forward.”
We’ve been living in this golden time where we’ve had low inflation and money was free, which has now come to an end.
Les Binet, Adam&eveDDB
A further proportion of sales may be relocated, such as running a promotion with Tesco on products a brand would have sold in Sainsbury’s without the price cut. For these reasons, repeated promotions tend to increase price sensitivity, price elasticity, reduce pricing power and erode margins, Binet added.
“Excessive promotion makes little sense at the best of times, but it really is madness right now when prices are rising and supply is tight,” he explained. “For many, cutting back on the promotional budget is a no brainer. That can produce big increases in profit.”
According to Binet, only when marketers have a handle on their price and promotions should they start thinking about advertising, which they should treat as a financial investment. In this context it makes sense for brands to think hard about shareholder value.
“Shareholder value gets a bad rap from people who don’t fully understand what it means. It’s not necessarily about being greedy and rapacious and generating short-term profits at all costs,” Binet explained.
“Shareholder value in the technical sense is about trading the long and the short of it in an organised and mathematical way. Shareholder value theory tells you that long and short-term investments should be dialled up and down, depending on a number of factors.”
An appreciation of shareholder value means marketers should be “clear eyed” about brand purpose and understand the “clear tension” between purpose and profit. Binet pointed to an analysis of IPA data last year published by Peter Field, his co-author on The Long and Short of It, which described the “vitriolic criticism” heaped on brand purpose as naïve and not entirely justified.
However, Field did acknowledge some of the criticism has basis in fact, claiming “an awful lot” of brand purpose advertising “doesn’t have much, if any, consumer effectiveness to talk about.”
“If you decide to pursue a purpose-driven marketing agenda you have to accept you will probably make less money. Purpose-driven marketing is about 30% less effective than normal marketing in business terms,” Binet explained.
“It’s harder, you have to do everything that normal marketing does and you need to do brand purpose as well. So, effectively you’re doing marketing with one hand tied behind your back. That might be something you can afford in good times, but you have to ask yourself whether or not you can afford it now, especially since consumer priorities are changing.”
Based on this analysis, he identified five factors marketers must consider for optimal investment:
1. Profit margins
The higher your profit margins, the more profitable all your investments become, Binet argued, meaning optimising price is the “first frontier”.
“Getting promotions in check is the easiest way to push through price increases and support margins,” he stated. “In the longer term, brand advertising can reduce price sensitivity, increase pricing power and help you to increase your prices and margins.”
Binet pointed to stats from the IPA databank, which show the more brands improve metrics such as mental availability, the more likely they are to reduce price sensitivity. In this way, advertising can help support price, not just to drive volume.
“Shifting money from promotions into advertising can be a great way to support price and can be highly profitable. If you’re really lucky you can do the clever thing of both increasing volume and price together,” he explained.
“Increasing demand and volume is quite profitable. Reducing price elasticity tends to be more profitable. But the real sweet spot is where you can increase demand and price together. Companies that can do that can make really large amounts of money. It sounds like defying gravity. It sounds like an impossible trick. It can be done.”
2. Growth prospects
To get a handle on the prospects for growth, marketers were advised to investigate how the wider sector is reacting to the inflation crisis and how competitors are behaving.
Understanding consumer behaviour is also crucial to getting to grips with growth. Binet outlined how over the past two years consumer consumption has included temporary spending cuts brought on by Covid, lasting cuts to spending, temporary increases in spending that fell back after lockdown and lasting increases in spending.
On this point, he urged marketers to use search data as a leading indicator.
“I’ve been a big advocate of share of search as a brand metric, but also looking at absolute search volumes can teach you things about whether your sector is about to go into decline or you might be one of the lucky ones,” Binet added.
3. Investment costs
There are often “bargains to be had” during a recession for brands prepared to invest. Binet described 2020 as the “TV cost per thousand bargain year of the century”, when television viewership went up at the point many advertisers cut spend.
“Unilever recognised – selling food and personal care – many of the brands it sold were more or less Covid-proof, and TV prices were good value. Unilever piled in and invested heavily, and reaped the rewards,” he explained.
“2023 might be another buying opportunity for many brands. This is why you need to understand your growth prospects to understand whether or not you’re in a position to take advantage of the bargains we’ll be seeing next year.”
If a brand’s share of voice is higher than its share of market, it will tend to gain market share, Binet also noted. As a consequence, businesses which maintain or increase their share of voice in a recession tend to emerge stronger. If competitors are cutting their spend, all a brand needs to do to gain share of voice is cut less than its rivals.
“It’s possible to win even when you’re cutting budgets as long as you cut a bit less than your competitors do. If you’re really ballsy, you’re really doing well and you’ve got the firepower for it, you could even increase your spend and drive your competitors out of business,” he explained.
“We’ve seen that recessions are a great time for those big brands with the firepower to demolish their weaker competitors. Two years where you increase your marketing spend when your competitor cuts. Two years can be enough to drive a competitor to the wall.”
4. Cost of capital
On this point, Binet urged his marketing peers to reduce the perceived risk of marketing investment by accurately measuring effectiveness in the short, medium and long term.
As mentioned during his IPA Global Effworks Conference address in October, Binet warned of the danger of relying on simplistic attribution, which often exaggerates marketing’s short-term impact and underestimates the long term. Indeed, he argued attribution modelling misses the activity which “matters for the survival of businesses” and can lead brands into a spiral of decline.
“People talk about marketing tenure and the fact CMOs don’t stay in the job very long. That’s always been a problem, it hasn’t changed that much during my career. The city being short term? The city has always been short term,” Binet noted.
“What has changed is the way we measure things. Our metrics have all become much more short term and they’re increasingly inaccurate. Digital measurement allows us to measure things really quickly and cheaply, and get the answers really wrong.”
If marketers are rethinking their budgets, they are advised to tweak and not slash, measuring the diminishing returns to understand where their optimum budget lies.
Noting that in tough times becoming “a bit more short-term” is often the right course of action, Binet encouraged marketers to understand the synergies between short and long-term media, and maximise shareholder value, not ROI.
5. Investment efficiency
In order to measure and optimise media efficiency, it makes sense for brands to partner with their media agencies to optimise budgets by geography, products and variants in the portfolio, and by channel.
“There’s another single factor that is just as important and that’s the creative. Getting the creative right is just as important as getting the media budget right,” he claimed.
“Yes, the abacus economics can help you make your budget go a lot further, but getting the creative right can also make your budget go a lot further in these tough times.”
Binet pointed to his and Field’s analysis of IPA data, which found award winning creative campaigns can make a brand’s media budget go 10 to 12 times further, illustrating the importance of investing in the science and harnessing “the magic”.
Despite laying out a roadmap to address inflation, Binet accepted some brands will be forced to slash prices in the current climate. He advised them to wargame price scenarios and accept there is no single answer. The best approach will depend on factors like price elasticity, a brand’s cost structure and how competitors are behaving.
“Some brands will discover when they go through that exercise that putting prices up or cutting promotions is a no brainer, regardless of what the competitors do. In other situations, it will only work if the competitors follow suit. The good thing about price promotions is you can turn them on and off, so you can do experiments,” Binet concluded.
“I’m not claiming it’s easy, but there are firms out there promoting away thinking that they’re growing their business and in fact all they’re doing is shooting themselves in the foot.”