It is axiomatic that a successful brand should command a premium price in the marketplace. Customers willingly pay such premiums because the brand offers higher quality, more innovation, greater trustworthiness (and associated reduction in risk), or more personal relevance, among other things. While this is true and justifies investment in brand building, it misses an important strategic advantage of successful brand building.
Pricing is fundamental to the management of a firm’s future financial success. The relationship between price and volume is well understood. All other things being equal, higher prices reduce volume. This does not mean that the price premium commanded by a brand necessarily reduces sales volume. Effective branding strengthens consumers’ brand preference, which has the effect of pushing the demand curve upward and to the right, as shown in Figure 1. This means that the consumer will pay more for the brand even at the lower end of the price/demand curve than would be the case for a comparable unbranded product. This change in the demand curve is what creates the strategic pricing advantage of a brand. The firm uses the change in the demand curve (shown by the curve that is upward and to the right in Figure 1) to capture greater volume, to increase the price (and margins), or some combination of higher volume and increased price that corresponds to at a point along the branded demand curve.
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A closer look at the improved brand demand curve is helpful for illustrating the array of strategic choices available to the firm that pursues an effective branding strategy. The new brand-driven demand curve, which is illustrated in Figure 2, creates a region of pricing latitude bounded at the top end by the maximum feasible premium price and at the bottom end by the maximum feasible volume that may be achieved by a low price. For most brands, the optimal price, as defined by the price that maximizes flow for the firm, is not the top or the bottom of the curve. Rather, the optimal prices are likely somewhere in the middle. In addition, the optimal price may vary over time. These facts produce important strategic options.
The firm might pursue a pure premium pricing strategy that seeks to maximize cash flow through the capture of large margins. However, a modest reduction in price might dramatically increase sales volume. The result might be an overall increase in cash flow, even with modestly lower margins. The optimal price for any brand is really an empirical question and can be addressed with market research. And, the effect of price is not just the result of taking share from competitors.
The strategic implications of the branded demand curve become even more interesting, and potentially more profitable, when costs of production and marketing are considered. If there are economies of scale in production and/or marketing, greater sales volume may be associated with reductions in costs, and a concomitant increase in margins. When the firm has a portfolio of products that share production, marketing, or distribution costs, the cost effects can become even more important.
But wait! There’s more. The same strategic pricing decisions associated with a branded demand curve also flow to members of the distribution channel(s). The firm’s branded demand curve also applies to channel members, who will have greater pricing latitude themselves. This, in turn, gives the marketer greater influence in the distribution channel because the brand is accompanied by strategic opportunities, assuming they are understood by the marketer and the channel member. And there are implications for managing adjustments to price over time, including temporary reductions (or increases) in price related to trade and consumer promotions.
Branding is not just about making consumers feel good about a product. It’s not just about the ability to charge a price premium. Rather, it is about creating strategic opportunities for the firm. Realization of these opportunities requires an understanding of the influence of branding on pricing and demand. It is also why effective branding is not just about marketing communication; it is about influencing the demand curve through strategic pricing decisions.
Contributed to Branding Strategy Insider by Dr. David Stewart, Emeritus Professor of Marketing and Business Law, Loyola Marymount University, Author, Financial Dimensions Of Marketing Decisions.
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Branding Strategy Insider is a service of The Blake Project: A strategic brand consultancy specializing in Brand Research, Brand Strategy, Brand Growth and Brand Education
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