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BrandLoop #6, May 1998

Pricing: A New Value Equation

There has been much discussion about the importance of the price value equation and how consumers have become confused by frequently changing prices. In many sectors, consumers have been effectively taught to buy on price. The overuse of money-off, added-product promotions or a longer-term low price strategy appears to be sending out the message that the lower price represents the true value of the product or service. From a consumer's perspective, what is to be gained from purchasing a more expensive product, unless there is a tangible or intangible benefit to doing so? A company may find it increasingly difficult to raise its price or margin under these circumstances. Through the Loop follows pricing and value-related developments as part of its BrandLoop Knowledge Development Programme and has analysed such issues for a number of clients. There now appears to be a number of key pricing issues in the marketplace and these are briefly summarised.

Adding or Removing Value

Marketing is adding value to a product to make it more attractive to consumers. This is part of the difference between a product and a brand. However, too often pricing is used inappropriately and this effectively removes value. The net result is a series of conflicting messages to the consumer. For instance, where there is long-term price promotion or overuse of individual price promotions/extra free product, the consumer can become confused about what value the brand has. In the long term, this means the potential loss of brand equity and the possible reduction of a product to commodity status, selling on price alone. Note that Virgin Vodka was recently withdrawn from some distribution channels, as the market was seen to be too price-sensitive. A move towards commodity status was seen as detrimental to the Virgin brand as a whole, not just the vodka.

Too often, we are able to observe situations where there are successive price reductions, the "prize" going to the company with the deepest pockets. While this may be good for consumers, a price war appears to have little long term benefit for marketers as it not only leads to lower profits but it also re-educates the consumer about the brand's value or lack of value.

There are instances where a low price strategy can be used to a company's advantage. Firstly, there is the case where a company has a significant and sustainable cost advantage. Maintaining a low price will help the company to increase volume and gain market share, all other factors being equal. Secondly, a low price may be used as a loss leader. This uses the continuous low price to attract consumers who will then also purchase products that are profitable.

Giving Away Your Core Product

This then leads to the next stage where the core product is given away at no cost. There are a couple of examples from the high technology sector that illustrate this strategy well. Netscape is credited with having made the World-Wide Web accessible and popular by giving away some 40 million copies of its Navigator browser software. This helped to establish a base of users and thus encourage Web-based organisations to use Netscape server software to ensure compatibility. Microsoft has used a similar approach with Internet Explorer. Sun Microsystems has allowed organisations to develop its Java programming language and has even worked with a number of partners to create a venture capital fund to invest in start-up companies in this area. Again, this is intended to help build up a user base and stimulate sales of Sun's servers. Each start-up that is successful adds value to the Java brand. Note that this strategy is different from distributing free samples as it is meant to achieve more than simply product trial. In both cases, the companies are looking to sell products and services through leveraging the market's pulling power.

Perfect Information Removes Differential Pricing

A differential pricing policy will become increasingly less relevant as the use of the Web or other cross-border channels for retailing rises. As the Web allows consumers to view and compare prices in different retailers and in different countries, it becomes relatively simple to circumnavigate a differential pricing strategy. This is even easier once intelligent agents are in place to find the best price for a specified product. A similar effect can be seen in the cross-border purchasing such as UK residents buying alcoholic drinks in France due to lower rates of duty or importing cars from other countries where taxes are lower. This has clear implications for UK manufacturers and retailers who are campaigning for lower UK excise rates so that the differential is narrowed.

As Internet penetration has increased in Europe, this has enabled retailers outside the region to sell directly to countries where the products may be more expensive. This is particularly evident in the music and books sectors. Here there are substantial savings to be made by sourcing products from the USA rather than purchasing in the UK, for example. This is even with the addition of carriage costs. Naturally, this has implications for retailers who are selling at a higher price. In many cases, they are prevented from competing with the lower priced retailers due to regulations. The imposition of artificial barriers to trade, such as copyright restrictions, does not work under this scenario and could lead, potentially, to a consumer backlash. It will be evident through the "perfect" information available that prices are being held artificially high. Removal of barriers is the only way to allow fair competition in this case. An additional area of concern here is that this trade may avoid local taxes, resulting in lower income for governments.

Variable Pricing

A further concept is that of variable pricing. This refers to charging different prices for the same product. An umbrella salesman who raises his prices when it rains is using this strategy as he has recognised that the product's value changes under such circumstances. This could also apply, for example, if a soft drink or ice cream manufacturer raises prices during hot spells. There is a change in the product's value but would this be seen as a cynical move on the part of the manufacturer?

Variable pricing is already found for items such as airline tickets. However, here the value is not compromised. While two travellers in identical seats may be paying very different prices, they have the same basic product but not the same extended product or brand. The passenger who has paid full fare is able to book well in advance, change reservations and have an open return flight, for example. Similar situations may be found for such products as theatre and cinema tickets, often using discounts to fill off-peak seats.

Further to this, the spread of technology allows buyers and sellers to have more information about one another. Retailers have databases of their customers' buying habits and so are able to tailor offers to individual, and this will include the price or level of discount.

Summary

Pricing is and will remain an essential element of the marketing mix. However, the rapid evolution of communications and distribution channels mean that companies will have to reappraise their price value equation. Differential pricing strategies where prices vary between buyers or countries will become less viable unless there are significant product differences. In commodity markets, a low price strategy will only lead to lower profits unless there are alternative profit streams.

Manufacturers and retailers should analyse their price value equations on a continuous basis. Consumers will know where they can buy cheaper so how do you justify a premium price for a brand? In addition to this, as we are no longer talking about mass marketing, it is vital to understand that the price value equation will be different for each consumer.

Through the Loop typically analyses pricing as part of a marketer's overall strategy. This is a recognition that pricing is not an isolated discipline but it works alongside and is integrated with a company's other marketing tools. Our best practice studies have shown how companies use pricing to its best, or sometimes worst, effect and our clients are able to gain important lessons from these experiences.

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