Chapter 12

Brand, Messaging, and Competition

Every book is a children’s book if the child can read.

—MITCH HEDBERG

Contextual pricing relies heavily on what customers know, or worry they do not know, about a product. This makes pricing exercises a lot like branding exercises, since branding managers spend a lot of time evaluating what customers, and potential customers, know and don’t know. Branding managers have the fun job, however, working at multiple levels to increase the propensity to buy. While complex, it tends to focus on the positive: matching customer affinities to company strengths. Customers like being made aware of products and solutions to their needs, and everyone in a company is delighted to see their company’s strengths communicated to the world. There is relatively little internal dislocation.

That is not the case with pricing in most companies today. Pricing does not wear quite the “white hat” of branding. But it could.

Suppose pricing did what it is supposed to, which is pay more attention to context and structure than to price level? Wouldn’t it be effective and enjoyable if you enabled high-usage customers to buy on a fixed basis, when previously all that was available was a variable plan—such as Spotify, allowing digital music lovers huge catalogues for a flat rate rather than pay-per-track? Or suppose you offered a warranty that let customers pick exactly what they wanted to have covered? Or suppose your company cut unnecessary components out of its bundles, so that buyers felt that they were not buying components they did not need?

A focus on context and structure would help turn pricing into a (marginally) more popular and enjoyable function, with only a few impediments to success. Sadly, those impediments are not trivial. Pricing may never be as popular with management, but the evidence is that it could be a larger contributor to revenue and profit than is branding.¹

One issue with pricing is that it tends to be more interventionist and demanding of internal company processes. For a price structure change, there are often billing system requirements, changes in sales training and practices, new financial and compensation plans, and even changes in branding plans. Change will be resisted, and if pricing management spends all its time fighting internal battles, managers will have little time to look outside the enterprise at the market.

Another issue with pricing is that it does not always end with a win-win at the customer level. Often the best outcome for your shareholders is that your prices go up—not necessarily the preferred outcome for your customers. In contrast, except for relatively infrequent branding missteps, branding can be a win-win most of the time—if buyers feel great about what they know about a product and feel good about what they have bought, then the benefit is mutual.

But both contextual pricing and branding are an inquiry into the nature of the decision process. Figuratively speaking, a good branding market research effort is within 15 percent of being a good pricing market research effort. The inquiry will typically address what buyers know and do not know about their purchase alternatives. Familiarity with potential purchases varies dramatically across industries and markets.²

Branding and contextual pricing should have a very similar focus.

Buyers’ knowledge of what they know, or want to know, matters a lot to pricing. For instance, if buyers are convinced that there is no difference among vendors within a category, they will refuse to pay a price differential—this is the definition of a commodity. Effectively, the commodity classification is a judgment by the buyer that he knows all he needs to know. Thus, while there are demonstrable differences among sources of wheat of a specific grade, or a category of steel, there is simple agreement that the differences will be ignored.³

The Four Dimensions of Brand

Applying four dimensions of brand, nicely outlined in Hamel and Prahalad’s Competing for the Future, we see linkage between brand and price.⁴ The four dimensions are as follows:

Affinity

Domain

Recognition

Reputation

Let’s take a closer look at each of these.

Affinity

High-affinity brands—such as Apple, the American Museum of Natural History, Volkswagen, and the Food Network—have opportunities based on their customer affinity. They can induce trial and acceptance of new price structures, and they enjoy other advantages. What is not clear is whether they enjoy a material boost in price level. Yes, in many cases high-affinity brands happen to command leading prices, but in many cases they deserve that premium on purely objective grounds (e.g., speed, engineering, scope of offer, ratings, etc.). Oddly enough, while you might expect affinity to have the highest impact on price, there is little evidence that it does. As an example from an industry where branding is central, a comparison of preferences for the two leading cola companies shows significant brand affinity differences by demographic. But despite these differences, there are no demographic patterns in syrup price: the pricing differences fall along other lines.

Domain

This term applies to whether the product or market is within the brand’s scope, i.e., whether a brand is plausible in a specific context. This is as applicable to pricing as it is to branding. Is the footprint of a brand domain similar to the footprint of price differences? Not quite. Brand is largely a relationship between customer and product. Price may exhibit very different patterns; for example, the soft handoff between airlines and rental car companies is not a function of airline brand domain, it’s a channel strategy that has an impact on price. Other influences on price, such as regulation, also may not match the brand domain.

Recognition

This is the level of product awareness, and it may vary from nil to acute. A particularly apt comparison for illustrating the differences in levels of product awareness is Scotch Tape versus BMW.

Example of Low Awareness. 3M’s branding decisions for its lines of clear adhesive tapes are based on how much attention consumers give adhesive tape (very little, it appears). According to 3M product management, the Scotch and Highland brands are kept separate because they offer distinctly different levels of quality. For example, Scotch, the premium brand, can be removed from paper without tearing the surface of the paper. Lower-priced Highland will tear the paper, and it appears less transparent. Since 3M knows that few, if any, consumers will take the time to read the specifications of its adhesive tape, the only way to maintain clarity as to quality is to separately brand the two tapes. Each has a different market focus: Scotch appeals to customers who are price-insensitive, while Highland competes with discount brands of adhesive tape.

Example of High Awareness. Car manufacturers, unlike 3M, have the luxury of knowing that most purchasers view a car as a major purchase decision and will therefore invest a fair chunk of time in investigating purchase options. Thus car manufacturers can support multiple levels of quality under the general umbrella of the total company brand. BMW wants potential purchasers to believe that it produces “the Ultimate Driving Experience” for different price levels. Although its low-end 3 Series may underperform its other cars, BMW believes consumers will have the sophistication to understand that for its class, the 3 Series offers superior handling compared with competitors’ cars.

Reputation

This dimension is the confidence of potential buyers that the offer will live up to a producer’s claims. Reputation is critical to pricing, just as it is to branding. For instance, bundling of consumer products and service tends to intensify the importance of brand to price. Customers expect, and generally believe, there is a bargain in the bundle.⁵ Given the many permutations of bundled offers, consumers can’t generally make direct comparisons to competing bundled offers; even if they could, they probably wouldn’t take the time required to do it right. Given this disinclination on the part of consumers to investigate the actual economics, brand plays a key role. A good brand may convince the consumer that a bundle is likely to represent a bargain and a well-integrated set of service components, while a poor brand will lead consumers to avoid a buying decision. This is why bundling is a tool that generally favors market incumbents.⁶

Where there is lack of clarity on the relative merits of different products, the “halo” effect of a brand can be vital. For instance, in the case of Web commerce, branding is a vital factor both in choice and price, in part because there is often little assurance on the trustworthiness of the online vendor.⁷

A great example of Web pricing power is Amazon.com. This Web titan enjoys strong customer trust, and so it has been able to sustain prices 7 to 12 percent higher than smaller online competitors’. A study further found that despite beating Amazon’s prices 99 percent of the time, smaller competitors’ share of online book traffic remained very small.

The Convergence of Pricing and Branding

The situation where brand appears to have the highest impact on price is where there is a convergence of recognition, reputation, and lack of information or clarity as to product quality:

There is high attention due to importance of the purchase and concern that there may be large differences among alternatives.

The brand value of one competitor or alternative, within the brand domain, is highly differentiated from others.

There is little opportunity for the potential buyer to easily or objectively confirm differences in product quality or value.

Convergence Examples

Some examples of when this convergence occurs:

Direct-mail advertisers must decide to buy either first-class or bulk-mail stamps for their letters. Their decision-making process illustrates the need to understand customer decision criteria: many mailers pay for first-class mail although, functionally, bulk mail (“Standard A” mail) gets the letter there within an acceptable length of time. Why pay more? The reason is that in some markets, mail recipients are three times more likely to open a first-class envelope than a bulk-mail envelope. Over time, mail recipients have learned that envelopes with first-class stamps tend to contain more important messages—a bill, a legal notice, or business correspondence. Bulk mail tends to be a waste of their time, so they don’t open it. Since the business of bulk mailers relies on how many people open their envelopes, many pay for first-class stamps.

Another example is automotive spare parts. A Mercedes diesel camshaft purchased from a Mercedes-Benz dealer costs $500. The same camshaft, in the same box with the same manufacturer’s logo stamped on it, can be had for $150 from an independent parts supplier. Other automotive parts also show threefold price differences.

Still another example is sunglasses. Surveys show that many sunglass purchasers pay for a better brand because they believe those glasses offer superior UV protection. In fact, an independent study recently showed that there are no discernable differences in UV protection in sunglasses that cost more than $5.

In each case, buyers make choices based on a lack of information. If mail recipients could somehow know what was in an envelope, they wouldn’t rely on the type of stamp when deciding whether to trash a letter or open it. Likewise, if car owners knew they were buying exactly the same part, they would opt for the lower-priced component. Finally, if sunglass purchasers knew that lower-cost sunglasses can offer identical UV protection, many would spend less.

A key pricing and branding context is: what do the customers not know?

The Power of Brand

Channel influences the importance of brand. On the Internet, the ability of brands to provide information is even more critical. Faced with an inability to touch, smell, and inspect food and grocery items, for example, patrons of online groceries tend to be more brand-oriented and less price-sensitive than shoppers in conventional grocery stores. Brand is used as a proxy for quality when quality cannot be ascertained easily, cheaply, or directly.⁸

While in some markets brand plays a pivotal role, in other markets brand has no impact upon price. In the 1960s, oil companies were heavy advertisers, and many consumers believed there were significant differences among major brands of petroleum. Since then, most of us have become aware that the differences are minimal. We’ve become correspondingly less brand oriented and more price sensitive—and as a result there is no longer an oil company on the Advertising Age list of top 100 advertisers.

Where product quality is simple and immediately discernable, the power of brand is limited. For example, one Ontario brick manufacturer decided to brand its products, and it invested in advertising and other tools to do so. While consumers eventually learned to recognize this brand, it had no impact on brick prices or market share, so the experiment was dropped. In a commodity business, brand usually isn’t worth the effort. Hence, in his book on brand equity, Professor David Aaker values brand equity in the stone, glass, and clay industry as zero.⁹

Brand can drive price level, but only under certain circumstances.

Management Tools to Maximize Brand Pricing Power

If your company happens to be a significant player in a market where brand does play a role, no doubt you have brand management in place. While normally, brand teams are measured on sales, awareness, and even buying disposition, often the team measures do not include price.

In some cases, that might be a complementary objective. In a time of scarce resources, it may make sense for these two functions to be tied together more closely. This also happens to close the loop: branders create opportunities for value capture and pricing ensures that opportunity is realized.

Some examples of brand actions that elevated price:

No surprise—one management action is good old-fashioned product advertising and branding. For instance, Clorox, the laundry bleach, spends over $500 million per year on advertising. Perhaps as a result, Clorox routinely commands a gross margin of 58 percent versus less than half that for competitors. It’s probably not the product quality that drives the price difference: the U.S. Supreme Court found, as part of an antitrust action, that chlorine laundry bleaches are identical in function and performance. At a minimum, the judicial finding suggests that differences are not easily observable. Consumers apparently agree that brand matters because they pay more for this leading brand.

Cost plays an interesting role in supporting branding and pricing. Persistently, a belief remains that price should be related to costs. Sometimes it does relate: showing consumers the costs involved in the making of a product will influence their perception of the product. On the other hand, cost is often not a driver of price in most B2B situations.

Some managers find the variation in the role of costs hard to accept. Recently, statistical proof was required for the sophisticated management of a leading programming network that the monies spent in producing a program had no impact on the price obtained from distributors. All that mattered was the productivity of the show: ratings and advertising carried.

Solid segmentation can also play a role. One cable company offered a bundle of a premium video service combined with its best telephony package. The trouble was that its VoIP-based telephony had a mixed reputation and, indeed, some minor technical limitations. That bundle did not do well until its positioning was changed to premium video plus cheap add-on phone lines. A strange result? No, actually—this made complete contextual sense. The core of this bundle, fitting for a cable company, was focused on video users. The premium video package was expensive: over $120 a month. That appealed primarily to higher-income families—who were not going to entrust their safety to a cable VoIP telephone service. When the telephony components were repositioned as an inexpensive add-on (e.g., kid’s phone, guest-cottage phone, etc.), however, the brand, context, and bundle were coherent, and sales improved.

These examples all fall at the convergence of the three price and brand factors of attention, value, and lack of easy comparison described above—three factors that come under the umbrella of context. The degree to which brand impact varies with the context supports the comment by advertising veteran Roger Kenrick: “Companies don’t own brands—customers do.”

Management should strategically employ branding for pricing purposes.

Summary

Companies should consider that it is consumers who determine when and how brand affects their purchase choice and price. Children will determine what is a children’s book, not the publishers. It is the context that determines whether brand will give your product’s pricing a lift—recognizing that your company’s reputation may not be the dominant part of the context. As described, both 3M and BMW are large, prestigious companies. Yet the brand dynamics for the two companies are very different: 3M’s Scotch Tape brand cannot support two levels of product quality, while BMW has several levels of automobile size and quality.

The question is: which of your company’s offers fall in the leverageable convergence of attention, brand value, and lack of buyer opportunity to determine differences in quality? If your company’s brand stacks up well in the relevant domain, it may be possible to leverage the brand for a material price lift in this part of the market.

Many managers view the value of brand as the overall impression that a company wants to create, or else equate brand only with customer awareness—but in fact, brand may be most powerful when tailored to the right context. Brand is an excellent tool for swaying customers and potential customers who will not fully investigate all aspects of their purchase decision.

Notes

1. Various pricing innovations have resulted in revenue lifts ranging from 7 percent at the low end for improved tactical tools; to 11 percent lifts because of improved pricing process, information flows, and controls; to 35 percent compound growth rates over five years and more due to better price structures. On a theoretical note, playing with Compustat will show you that a 1 percent improvement in price is, on average, worth a 7.1 percent increase in profit across the S&P 500. The variation in industries shows a 1 percent increase in price means 6.8 percent in profit in consumer products, 10 percent for insurance, 13.5 percent for transportation and 22 percent for heavy industry. In contrast, brand today is linked primarily with revenues rather than price, and a 1 percent increase in revenues has less than half the profit impact of a 1 percent price increase. That is not a criticism of branding efforts, as branding still comes in way ahead of, for example, cost reduction in impact on profits.

2. Self-reported consumer knowledge varies both by product and market, and over time. See David Aaker, Managing Brand Equity, Free Press, 1991.

3. As described in Winning the Profit Game, Chapter 2, there can be material differences in quality among commodity products such as cold-rolled steel. Differences in quality in commodity products are manifested in nonimmediate price behaviors. For instance, when one steel mill (DOFASCO) produced cold-rolled steel with better stamping properties, the benefit to the mill was not price per ton but that automobile manufacturers placed that mill in a better position on the “drop” list in case of a demand turndown.

4. Gary Hamel and C. K. Prahalad, Competing for the Future, Boston. Harvard Business School Press, 1992, pp. 258–230.

5. Based on focus groups in five major cities, on the topic of medical service bundles.

6. Market leaders can often wait a year before following important bundle trends. Companies with less than a 40 percent market share have been shut out if they waited this period of time. “The New Wholesalers,” Telephony, January 26, 1998, pp, 26–34.

7. Byung-Kwan Lee, Ji-Young Hong, and Wei-Na Lee, “How Attitude Toward the Web Site Influences Consumer Brand Choice and Confidence While Shopping Online,” JCMC, Indiana University, January 2004. A cartoon showing two dogs cruising the Internet on a computer described it more succinctly: one comments: “On the web, no one knows you are a dog.”

8. In fact, even when it can be ascertained easily and unambiguously, cost of trial may prevent sales. For instance, a new generation of men’s blade razors encountered resistance at $16.99 for a four-pack of cartridges. Gillette complained that many potential customers did not believe the claims about shaving. “Razor Burn: A Flood of Fancy Shavers Leaves Some Men Feeling Nicked,” The Wall Street Journal, July 12, 2010, p. A1. One potential answer to this problem might the two-part charging strategy (how appropriately) called the “razor and razor blade strategy.”

9. Aaker, Ibid. The patterns tend to link with common sense, for once.