The Impact of Branding on Pricing

The Impact of Branding on Pricing Power: How to Command Premium Prices

Cultivating a robust brand is critical for businesses, as it offers a key advantage: pricing power. Research by Millward Brown shows that strong brands typically achieve three times the sales volume of weaker brands and enjoy a 13% price premium. This means that powerful brands can command higher prices for their products or services while retaining customer loyalty.

In this article, we will explore how to gauge your brand's pricing power, how it fits into your overall branding strategy, and the importance of differentiation, customer loyalty, and brand perception in influencing pricing power.

Understanding Pricing Power

Pricing power is a company's capacity to increase or maintain prices without losing sales volume. In essence, it is the ability to demand more for a product or service because customers view it as more valuable than competing offerings.

For a brand to possess pricing power, it must excel in Relevance, Differentiation, and Top-of-Mind Awareness (TOMA). Pricing power is an essential metric when assessing branding ROI. Millward Brown identifies three variables that affect pricing power: Brand Power, Brand Premium, and Brand Potential.

Brand Power represents the market share a brand can attain based on customers' inclination to choose it over competitors.
Brand Premium is the price a brand can demand based on customers' willingness to pay more for that brand compared to competitors.
Brand Potential is the probability that a brand will increase its value share within the next 12 months, solely based on current customer perceptions.

Differentiation, a key indicator of brand potential, refers to a brand's ability to distinguish itself from competitors. In branding, it's often said that "being different is better than being better." Millward Brown's analysis of pricing power explains the reasoning behind this. If a brand can establish a unique point of difference, customers will view it more favorably, and its brand potential will rise.

Examples of Brands with Pricing Power

Two well-known examples of companies that have successfully harnessed their branding to gain pricing power are Apple and Starbucks. Apple has created a powerful brand image based on innovation, design, and quality, allowing them to charge premium prices for their products despite strong competition. Similarly, Starbucks has built a brand that signifies quality and a unique customer experience, allowing them to charge higher prices for their coffee compared to competitors.

Increasing Differentiation to Boost Pricing Power

To increase differentiation, businesses can:

Focus on delivering exceptional quality, customer service, or unique features that set them apart from competitors.
Create a compelling brand story or mission that resonates with customers and fosters an emotional connection.
Invest in innovative product development, ensuring their offerings stay ahead of the competition.
Develop a strong brand identity and communicate it consistently across all marketing channels.

The Role of Customer Loyalty and Brand Perception in Pricing Power

Customer loyalty and brand perception play a crucial role in a company's ability to wield pricing power. Loyal customers are more likely to remain committed to a brand, even if it charges higher prices than its competitors. Brand perception – how customers view a brand in terms of quality, trustworthiness, and value – also influences their willingness to pay a premium price. Building a strong brand that fosters customer loyalty and positive brand perception is vital for businesses seeking to command premium prices.

Challenges in Building a Strong Brand with Pricing Power

Some challenges companies may face when trying to build a strong brand that commands pricing power include:

Stiff competition from other brands with similar offerings.
Difficulty in communicating the unique value of their products or services.
Limited resources for marketing and brand-building activities.
Maintaining a consistent brand image and experience across various customer touchpoints.
Adapting to market changes and evolving customer preferences while staying true to the brand's core values.

Measuring Pricing Power

Understanding what makes one brand more potent than another is crucial, but organizations also need to evaluate their own brand's strength. Most companies tend to concentrate on readily measurable and immediate performance indicators provided by marketing metrics, despite their short-term focus and potential for misrepresentation.

Examining the total impact of branding on sales reveals that only 18 percent is measurable by online attribution. A balanced approach combines short-term marketing and long-term branding efforts. Allocating less than 60 percent to branding prevents the accumulation of the necessary brand equity for future sales growth.

It's more important than ever for CMOs to build a persuasive business case for branding's ROI. They should be prepared to challenge CEOs and CFOs' default focus on tactical marketing strategy (short-termism) with a convincing argument for the long-term return on investment in brand building.

To measure pricing power, it's crucial to assess the three variables that influence it: Brand Power, Brand Premium, and Brand Potential.

Brand Power can be gauged by conducting market research to determine the market share a brand can attain based on customers' inclination to choose it over competitors.
Brand Premium can be gauged by conducting market research to determine the price a brand can demand based on customers' willingness to pay more for that brand compared to competitors.
Brand Potential can be gauged by conducting market research to determine the probability that a brand will increase its value share within the next 12 months, solely based on current customer perceptions.

Differentiation, a key indicator of brand potential, refers to a brand's ability to distinguish itself from competitors.

The Impact of Negative Branding on Pricing Power

Introduction to Negative Branding

Negative branding, or reputation damage, refers to any situation where a company's reputation is tarnished due to scandals, poor customer service, low-quality products, or any other factors that lead to a loss of trust among its customers. This loss of trust can significantly impact a company's pricing power, as customers are less willing to pay premium prices for products or services from a brand they perceive negatively.

Case Study: Volkswagen's "Dieselgate"

A prime example of the impact of negative branding on pricing power is the Volkswagen emissions scandal in 2015, also known as "Dieselgate." Volkswagen was found to have intentionally programmed their diesel engines to activate certain emissions controls only during laboratory emissions testing. This scandal severely tarnished the company's reputation for reliability and integrity. As a result, Volkswagen's pricing power was compromised, and the company had to invest heavily in damage control and brand rehabilitation.

Case Study: United Airlines and Wells Fargo

Other brands, such as United Airlines and Wells Fargo, have also experienced significant reputation damage due to public relations crises. United Airlines faced backlash over the forcible removal of a passenger from an overbooked flight in 2017, while Wells Fargo was involved in a scandal involving the creation of fraudulent accounts in 2016. These incidents led to a loss in customer trust and reduced pricing power for both companies.

The Road to Recovery

Recovering from reputation damage often requires substantial effort and resources. Companies need to acknowledge their mistakes, take responsibility, and implement measures to prevent similar incidents in the future. This may involve investing in customer service training, improving product quality, or enhancing corporate governance.

Leveraging Technology for Brand Building and Pricing Power

In the digital age, technology plays a pivotal role in brand building and enhancing pricing power. Digital marketing and social media platforms have become indispensable tools for businesses to reach, engage, and understand their customers. Online engagement strategies, such as interactive content, personalized communication, and responsive customer service, can significantly enhance a brand's visibility and reputation. Influencer marketing, another powerful strategy, leverages the reach and credibility of popular individuals to promote a brand, often leading to increased customer trust and willingness to pay premium prices. Furthermore, data analytics tools can provide valuable insights into customer behavior and preferences, enabling businesses to tailor their offerings and marketing efforts to meet customer needs effectively. By analyzing data on customer purchasing habits, feedback, and online interactions, businesses can identify what makes their brand valuable to customers and leverage this information to enhance their pricing power.

Conclusion

Pricing power is a vital metric when assessing branding ROI. To thrive in today's competitive landscape, organizations must invest in building strong brands that can command premium prices, boost sales volume, and attract top talent. By evaluating the three variables that influence pricing power – Brand Power, Brand Premium, and Brand Potential – businesses can gain valuable insights into their brand's strengths and weaknesses and devise strategies to enhance their brand's overall value and pricing power.

Key Takeaways

Pricing power is a company's ability to increase or maintain prices without losing sales volume, and strong brands typically have greater pricing power.
Branding impacts pricing power through three key variables: Brand Power, Brand Premium, and Brand Potential.
To develop pricing power, a brand must excel in Relevance, Differentiation, and Top-of-Mind Awareness (TOMA).
To measure a brand's pricing power, businesses should evaluate the three variables by conducting market research, focusing on customers' inclinations, willingness to pay more, and perception of the brand's potential.
A balanced approach, combining short-term marketing and long-term branding efforts, is essential for building strong brands that can command premium prices and boost sales volume.