Price and the Advertising Premium

generic-vs-name-brand
Peter Drucker, the original management guru, once taught, “If you can’t charge a premium price for your product, then you don’t have a brand.”

So how do brands get to charge that premium?

A brand differentiates itself from commodity products by attaching emotionally-relevant memories to itself, very frequently through advertising. With the exception of a few “anti-brands” that compete by advertising low price—for example, Walmart, or Geico insurance or Suave shampoo—most brands generate a higher ROI by charging a premium price based on their differences, which they articulate in their branded communications—whether that’s a commercial in a pod or social media content or an OOH billboard at the bus stop.

The evolution of brands helps us understand the role advertising plays in their development. The original idea of a “brand” was as a mark of ownership or identity, as in branding cattle. A more modern sense of the word as first pioneered by the Nabisco company in the later 1800’s to sell biscuits; it was then more fully developed in the Madmen days of the Fifties and Sixties when brands became trust marks, to separate the higher quality product the company made from inferior quality, “commodity” (i.e. price-driven) products competing in the same category.

Because of the difference in quality (real or perceived), brands could charge a little more—a premium price—though these days brands often can charge a higher price because of emotional attachments to it rather than due to any real functional differences from competitors. This comes from the identity of the brand itself and the quality customers perceive to be attached to it.

The two ideas of identity and quality come together when you realize that the concept of ownership applies to both sides of the transaction—in a very real sense the buyer “owns” the brand as much as the seller does. This is due to the memory-forming effects of advertising and how the three memory systems of the human mind respond to stimulus about the brand, i.e. advertising.

While the rational, semantic memory system is concerned with the small functional differences, the more irrational episodic and the procedural memory systems are engaged in managing our concept of Self—and therefore selectively incorporate the brand imagery projected by advertising in how we build and express ourselves.

And it is for these self-defining images the customer is willing to pay a higher price.

The makers of luxury brands have long understood that images-attached-to-self can be more valuable than functional product benefits. That’s why companies like Louis Vuitton, Chanel, Hermes, Gucci, and Tiffany are among the most profitable businesses in the world.

Indeed, charging a higher price is an actual feature, not a barrier to purchase, of a luxury brands– because ownership signals exclusivity and affluence—a membership card in a higher social class.

In the age of Amazon and behavior-driven marketing, price and features and benefits are front-stage (e.g. in product reviews). There is perhaps a lesson to be learned in the fact that while manufacturers and retailers of everyday consumer packaged goods are in serious decline, image-driven makers of luxury goods are enjoying strong growth. Why is that? Image.

Researchers who build mathematical models of how various marketing elements work together to drive ROI –aka marketing mix modelers—have long been criticized for leaving the variable of creative quality out of their models, while focusing on metrics like media spend, promotion, distribution, price, etc. This omission is usually due to lack of standardized metrics over time that are reliable for evaluating creative quality across different ad executions and media formats, including competitive advertising.

There is also the failure of these math models to take account the interaction between the quality of its advertising and the price consumers expect to pay for a brand.

A few years ago, we ran an experiment researching the effectiveness of 37 TV commercials for 6 pain reliever brands in the highly competitive over-the-counter (OTC) drug category. We used the standard Ameritest interview and collected data from 3700 consumers. Among other things, we studied the impact of ad quality on consumer price expectations.

To measure price expectations, we added to the end of our interview a widely-used measure of price-sensitivity developed in the 1970’s by the Dutch economist Peter H. Van Westerndorp. His method uses four simple questions related to each respondent’s expectations for a product’s price—

  • At what price would you consider this brand to be so inexpensive that you would question its quality and believability?
  • At what price would you find this brand to be such a good value that you would definitely buy it?
  • At what price would this brand start getting expensive, but would still be worth considering?
  • At what price would this brand become so expensive that you would not even consider buying it?

When analyzed together, these questions can be used to determine the average expected price for the brand—based on the advertising the consumer just saw.

We found was that there was a strong relationship between advertising quality and the price consumers expected to pay for the brand.

The advertising price premium was equivalent to raising prices from 10 to 20% across the 6 different brands—potential profits that could drop right to the bottom line. The different prices brands were given permission to charge was directly linked to the quality of their advertising. That should give us all another reason to think about advertising quality.

Consumers use brands as a way to organize information in a category, and that information is emotional and self-defining. It falls to the way brands communicate through advertising to shape and share that information. And it is that information that is such a powerful conduit to price.