Lots of marketers mistakenly believe that price is entirely a function of the monetary exchange. For example, one petroleum company client has an entire floor of pricing analysts dedicated to setting price with real time pricing data for every gas station in the country. It was challenging to help them to realize that pallets of firewood on the forecourt and an overstocked, busy convenience store were almost as important in setting their price image as the fuel price boards displayed on the roadside.
Brand owners often wrongly assume that consumers know their price. Forethought conducted a study in the quick service restaurants category. Respondents were given a “menu board” and asked to fill in the prices. It was found that heavy users of those restaurants were no better at correctly estimating the price of an item than respondents who did not have that restaurant in their repertoire. Even for staples such as large fries, the average error was 15.4% for existing customers of that chain. There are exceptions; in retail grocery we have seen most shoppers able to recite to the penny the price of ‘known value items’ such as toilet tissue or milk.
Price is made up of price, price cues and non-price cues. An example of price cues are coupons and discounts. Examples of non-price cues would be a price-match guarantee or physical attributes such as store atmosphere and layout. When a consumer rates a brand on being price competitive, price knowledge (as limited or as complete as it is) and all cues, conscious and non-conscious are considered. The relative importance of cues in the consideration of price competitiveness varies by brand, category, and consumers.
Price image forms a large part of how consumers perceive competitive pricing. Forethought refers to the management of the price image as “price brand.” Price brand is the brand owner’s reputation for being price competitive.
Organisations with a strong price brand get price checked less, enjoy larger basket sizes, and attract greater foot traffic. Price brand has been successfully applied by financial services, airlines, telecommunications services, departments stores, grocers, restaurants and so on. Price brand is equally relevant for both every day and premium products as well as services.
The Effects of Price Brand
Forethought has frequently helped clients to achieve sizeable shifts in demand whilst actual price is held constant and non-price cues have been communicated to lift the relative price brand. Price brand effects can endure for years and indeed, decades. Building a price brand today for immediate-term volume is entirely consistent with brand building for the future. Price brand is an element of the Forethought communications triple play. That is, marketing communications which simultaneously elicits the target discrete emotion, communicates a single element of product or service quality, and builds the price brand.
Here is an example; Forethought asked Americans to score six outlets on how price competitive they believed each retailer was for a 40mm Apple Watch, Series 5 GPS. The actual price at each of the outlets as at August 2020 is shown in the following table.
The graph below reveals the comparison of these price competitive ratings relative to the actual prices. The findings demonstrate that if the decision was purely based on price, consumers would most likely purchase their Apple watch from Walmart. Their expectation is that Walmart will be most price competitive. Price check reveals that the Walmart and Best Buy actual prices are identical. However, Walmart has the superior price brand and therefore for this item, gets above the odds foot traffic. Amazon has the actual lowest price but not the best price brand.
The effect of price brand for Walmart can be further illustrated using a hypothetical demand graph below. Walmart charges full price and due to the strong price brand, gains additional demand. This is the return on price brand.
Building a Price Brand
Consumers form impressions of price competitiveness before they are exposed to pricing information. Building a strong price brand requires identifying cues that lead consumers to associate the brand with being price competitive. Step one in this process is to separate price cues from non-price cues.
For non-price cues to work the claim needs to be consistent with other elements of the brand. In Australia, IGA has found price guarantees is inconsistent with being locally owned. In the U.S. Whole Foods discovered, “organic” was a non-price cue for expensive. Non-price cues can contribute to almost half of how buyers assess your price competitiveness. The following exhibit is for an Australian department store. It shows that 40.4% of the price competitive rating was explained by non-price cues.
Department Store – Relative Importance of Price and Price Image (non-price cues), determined using multivariate analysis.
The price brand approach requires the brand owner to first hypothesise what the price and non-price cues/attributes are. Next is to ask customers and non-customers to rate these attributes against a dependent variable. Multivariate analysis then provides a hierarchy of importance for the price and non-price drivers. From this, the brand owner knows what to communicate to improve their price reputation without reducing price.
One U.S. restaurant client was unable to talk about a specific price offer so it used non-price cues such as the talent chosen for its advertising – older people, university students, other demographics such as ethnicity and amount of food on the plate, to signal price competitiveness.
Price brand is particularly critical in markets where market share is rapidly evolving. Streaming services in the U.S. are pushing for deeper penetration as the category becomes a two-horse race between Netflix and Disney. Both are spending heavily on content in the hunt for new subscribers. On price reputation, Disney and its subsidiary Hulu has Netflix surrounded and despite HBO Max having the might and power of the Warner Bros catalogue, it suffers from a poor price brand and this will impede its progress.
In a nutshell
Instead of just managing price, manage price brand. Non-price cues can markedly change the immediate and long term price perceptions of your brand. Price brand analysis provides management with a data-validated lens on which non-price attributes to address to most effectively position the brand on price. Some non-price cues are subtle such as the talent appearing in your marketing communication and some shout from the rooftops like price-beat guarantees.
Ken Roberts, Chairman Forethought