Brand value is weighed in times of uncertainty

During the pandemic, there was a pressure on brands to be present, whereas now, it’s all about the price. Consumer behaviour in 2023 could be summarized as “price, not presence”, but this would be an oversimplification. The issue is rather creating value and understanding what ultimately produces value, writes Paula Hernetkoski.

More and more consumers find themselves having to consider their spending more carefully. Even those who do not necessarily have to do so, are being more cautious. However, it is too easy to simplify things by focusing on the price. When price becomes more important in making purchase decisions, the importance of brand value as the basis for price also grows. Now more than ever, we need to take a closer look at how value can be created – what different audiences are willing to pay for, what matters in the category and what kind of value gives us a competitive advantage?

Price is often seen as an absolute variable and a rational decision-making criterion, but it is so much more than that. Price plays a significant role in the emotional state created by a brand. The price decision is based on highly intuitive, unconscious decision-making, although we like to explain the decision to ourselves afterwards using rational arguments. A low price can signify responsible consumption in one context, a great bargain in another context, a poor quality in a third context – all for the same person.

The famous words of Warren Buffett describe the situation well: “Price is what you pay, value is what you get”. Whether it’s buying coffee or a new TV, willingness to pay is typically based on highly emotional views about the significance and benefits of the product or service. What kind of status, service experience or sustainability does the brand represent? Can it be trusted in the long run? Does it represent the values I believe in? Will it make my life easier? What will others think about it; will I belong to the group?

Marketing communication plays a major role in communicating these promises. According to a global survey of 350 brands conducted by Kantar in the years 2003−2010, long-term brand advertising that has been proven to increase consideration and preference significantly reduces consumers’ price sensitivity, enabling price increases without having to fear a fall in demand*. The rapid impact of advertising also helps when the competition over consumer spending grows more intense: advertising reminds consumers of the brand, its competitive advantages and user experience, making the brand a compelling choice over competitors, even if the price point is higher.

There is a lot of talk globally about giving price an even bigger role in the marketing toolbox this year. Granted, this is due to a genuine decline in purchasing power, tightening price competition and the demand for transparency in price communication. But at the same time, it all comes down to understanding consumer behaviour. At least seven critical themes have been addressed in the debate.

1. Understand where brand value comes from

The willingness to pay a certain price is a highly emotional decision. Find out what the consumer is actually paying for when they buy your brand instead of other players in the category or potential substitutes. What is the price elasticity of the product or service in different consumer segments and, above all: what short-term and long-term measures should you take to strengthen the brand’s price position? What kind of user experiences or impressions is the brand value built on? How does it stand out from the others? Marketing communication helps to ensure that the brand remains on the consideration list of the category, is familiar − well-known, approachable and thereby easy to buy − and communicates value and differentiation.

2. Provide options

Is there a need to increase the price of your core product or could you provide options instead, such as paid transport, additional services or new package sizes? The consumer will ultimately decide what they want to pay for. This makes the value of different services and product elements concrete and creates options for different consumer segments. However, you should first find out which product and service elements are considered so critical to the core product that without them you will start losing customers or at least credibility in the short term.

3. Reduce the risk of buying

Willingness to pay grows when the perceived risks are lower. Does your product promise sustainable value and a long service life? Lego bricks, Gore-Tex products and strollers that grow with the child are good examples of this. Could you provide a repair service to extend the life of your product or reduce the feeling of risk at the point of purchase by offering flexible terms of guarantee? One particular car manufacturer gave buyers the right to return their car if they became unemployed within a year of the purchase.

4. Identify moments of need

Understand the situations in which your category is most relevant or when it is difficult to replace with anything else. Innovate new services for the moments when consumers are willing to invest, such as the holiday season or major turning points in life. Could you generate more interest through scarcity, special editions or exclusive benefits? Guarantee interest towards your brand through timely marketing communication and activate consumers as the entry point approaches. Engage them later with extra services and additions to the product category.

5. Change the comparison group – increase price elasticity

Significant growth potential lies in between categories. By expanding conventional category boundaries, we can combine various needs and ideally create entirely new competitive advantages, to which the competitors in the category cannot react, at least not very quickly. One example of an easy, quality solution can be found in the market for groceries: the M&S Dine in concept created a new category between store-bought ready-made meals and restaurant takeaway dishes, significantly increasing consumers’ willingness to buy in the process. Now this grocerant trend has also arrived in Finland.

6. Innovate ways to increase purchase frequency

Make use of customer loyalty programmes and engaging communication to activate repeat purchases. Identify new, potential distribution channels and use advertising to inspire new uses for products in addition to the familiar ones. Reward commitment. Look for ways through product and service development as well, such as small service innovations that make the consumers’ life easier or help them start using the product more quickly.

7. Do not allow price promotions to erode your profitability

Price promotions appear to lead to a spike in sales, but this sales effect is often an illusion. Usually, the actual increase in sales in very small, because the majority of the sales volume of price promotions is just subsidising existing sales: you’re giving away discounts to people who would have bought you already or would buy you next week. You may also cannibalize other channels by providing discounts in one channel. Repeated price promotions erode your margins, reduce your pricing power and reduce brand value. According to the estimate of the Nielsen research organization, up to 84% of price promotion campaigns reduce profit**. If you do use price promotions, reward commitment and make sure that you activate new customers and new sales or support e.g. the growth of your market share in the competitive season.

When speaking of purchasing power and price communication, you should also keep in mind that although caution is the word of the day in Finnish buying behaviour, we also see strong polarization in purchasing power: whereas 68% of Finns practice more caution when making purchase decisions, almost a third report that their consumption habits have not changed very much recently. For example, more than a third buys restaurant and café services just as much as before***.

The price strategy is, in fact, customer insight at its best: understanding what creates value for current and new, potential customers. This requires persistence in understanding the needs of different customer segments – what is relevant for the different segments – and often tough decisions about which segment's needs we want to serve in the first place. The meaning of every brand is somewhere between a commodity and a status symbol. It all comes down to differentiation. Truly distinctive products and services are harder to replace, which also reduces their price sensitivity.

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Sources:

*Raising prices? How advertising strengthens your brand’s pricing power, WARC Exclusive, (September 2022)
**Les Binet, Marketing planning in turbulent times (2022)
***Source: Sanoma Consumer Pulse IV (04/2023)