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Pricing - Preisdurchsetzung mit Marke

4. Oktober 2022

Pricing: The Brand Improves Your Margins and Price Realization

There are lots of reasons why a company may need to change its prices – perhaps due to inflation, changes in the supply chain or a different production method. If it uses its brand to do it, the chances of success improve. We’ll show you how it’s done.

There are lots of reasons why a company may need to change its prices – perhaps due to inflation, changes in the supply chain or a different production method. If it uses its brand to do it, the chances of success improve. We'll show you how it's done.

Here's something we at BrandTrust experience a lot: We encounter companies who are completely focused on sales, at any price – and despite all their efforts they cannot get ahead. This is when we have to tell them honestly: Sorry, you are on the wrong track.

Next, we encourage them to rethink their pricing strategy. Because pricing can be made more profitable – without cutting prices and continuously granting new discounts. Actually, we have been amazed for years that this is still not common practice.

Find out how it's done in this longread.

1. The significance of the brand for pricing

Why are we at BrandTrust, as brand consultants, dealing with pricing? We all know: Especially when you work with ad agencies, when you mention the word "brand" everybody thinks it's about marketing and communication, about entertaining the crowd.

But the fact is: Brands are also instrumental for pricing. The whole reason they were invented in the first place was to be able to realize higher prices! That's why pricing is a brand issue. People just tend to forget that.

We would now like to encourage you to take the brand perspective to find the right answers for your pricing strategy. Because your brand has powerful functions you can use successfully in your pricing.

A brand provides the meaning that boosts sales

Selling is easy, if two conditions are met. First: The customer wants something you have. Second: The customer can't find anything comparable on the market. Then you can ask just about any price. It's almost like having a monopoly.

But if your product is just one of many, meaning it is highly comparable, selling it becomes difficult. That's the reality many companies are battling.

If your sales representative comes back from a sales meeting and is frustrated because all the potential buyer wanted to do was drive your prices down, that means a number of mistakes were made long before the meeting. Because the buyer was not provided any of the information they need to make their purchasing decision.

I know, this is how it's done, especially in bidding processes. Public clients use this method to force comparability. Your job is to resist. You must make yourself incomparable. Your greatest ally in this effort is your brand. As soon as it is brought into play, the situation changes: Because this is where the meaning comes in that convinces buyers.

The brand is instrumental for changing this problematic situation. Because it provides meaning. And meaning is the stuff you need to realize prices.

2. The difference between price game and value game

The first lesson learned for brand managers: They have to decide if they want to play the price game or the value game.

1. They decide to play the price game. In this case, they need to be the cost leader, otherwise it won't work. I urge you to consider: The rank of the lowest, most affordable, the cheapest provider can only be bestowed once. The price game has only one winner. The second cheapest is already too expensive and doesn't stand a chance to win a bid. Your entire business model must be geared toward it.

But the reality in many companies is: They can't decide and mix it with the value game. There are euphemisms for this method that try to cover this up, for example "Value Line". In such cases, we have to assume that what is offered is the opposite of "value"– the cheapest, which doesn't fit the brand, or the message or the strategy. You can imagine what the result will be.

2. They decide to play the value game. There are a number of positions to occupy: the most exotic, the most innovative, the highest in quality, the one with the fastest delivery. We at BrandTrust, you will not be surprised to learn, deal with the value game. Read on to find out what makes this variant so interesting.

3. The 4 Ws of the value game

The value game does not focus on the well-known "4 Ps" of marketing (Product, Price, Place, Promotion). No, it deals with the 4 Ws:Werterzeugung (value creation), Wahrnehmung (perception), Wertschätzung (appreciation) and Wertschöpfung (added value).

1. Werterzeugung – Value creation. First, a convincing value must be created. The amazing part is: That value is already there, you only have to recognize it and reveal it, meaning make it visible! This is not about the performance or the product, but about the value that ultimately results.

As consultants, we have the privilege of being introduced to companies by their top managers. And the more we learn, the more amazed we usually are: It is incredible what these companies can do! Why in God's name doesn't anybody know about it? It doesn't matter whether they make cheese or medical products.

Often, companies are stuffed to the brim with peak performances. But they are not conscious of it, they don't think it's important. The reason they usually give me is: "We are all about the price, we're a commodity." Tough, but true: If that is their attitude, they have already lost. Because it means: They are only focused on quantity and price – and that makes them interchangeable.

This is where you need a different attitude. You should be convinced: "I have the sexiest, most thrilling, most interesting product in the world – even if it is just salt or gravel!" Then you have a chance at getting in the game.

2. Wahrnehmung - Perception: The value that has been created only counts for anything if people perceive it. That's why you have to constantly keep it tangible, for instance in your brand communication – because what is not made perceptible simply does not exist in people's buying decisions or Corporate Influencer 

3. Wertschätzung - Appreciation: When consumers perceive the value and judge it positively, appreciation results. This is when they are willing to pay for it, because they perceive added value.

4. Wertschöpfung – Added value: When you have developed values that people perceive and appreciate, you can reach your actual pricing goal: added value – the core target of all business activity. Because the brand is never an end in itself, but a means to an end for achieving outstanding business performance.

4. How to determine the basis of all pricing: the added value

You have two options for increasing the price. You can increase the objective benefit and/or increase the subjective benefit.

Let's take a simple chair as an example: Its objective benefit is that you can sit on it. Its subjective benefit is much more varied and different for everyone. For instance: You like the design. You can sit on it comfortably for hours and lean back. It has armrests for a more relaxed working position, and so on.

Every product, every service always has these two types of benefits. Both added together are, quite simply, the gross benefit. An interested buyer mentally subtracts the price they would have to pay from this gross benefit. What's left is the added value.

This is the key point: People don't buy the offer that is cheapest but the one with the highest added value. Regardless of whether we are buying a pack of gum at the gas station or deciding on an investment of many millions: Ultimately, we always choose the best added value.

• To increase the objective benefit you need, for example, an innovation or test certificates – meaning you renew or optimize the products. The resulting benefit, however, has a half-life, depending on the industry, of half a year or two years. By then, at the latest, the competition will have caught up. Focusing on the objective benefit is expensive and risky.

• The other option is the subjective benefit, which is emphasized much too rarely. This is about the value that consumers perceive. The question is: How can I further optimize attributes that consumers already associate with the brand? That's how the subjective benefit increases – and with it the gross benefit, and an important mechanism is triggered for the benefit of the interested buyer: the added value increases, and you can sell the product or service at a higher price.

That means: If you manage to create a strong value and make it tangible, then you can easily realize higher prices.

5. Price acceptance results from trust

This is the highest achievement a brand can aspire to: To get people to trust it. Why? Because they stop comparing it with other brands. They don't have to stop and think any more, but just decide in favor of the brand because they trust it blindly. If a buyer researches comparison portals like Check24, the battle is already lost. Comparing is always an indication of mistrust.

Despite its enormous significance for successful sales, trust is an aspect that is too often neglected in the pricing strategy. Essentially, building trust takes three factors:

1. Competence: Trust is developed when people perceive competence and performance.
2. Good will: Consumers must feel that you mean well and recognize your attitude. B2B brands have an advantage over consumer goods brands in this regard, because they usually have close and direct contact with their potential buyers and can thus communicate their good will better. Consumer goods, by contrast, which communicate only through their packaging, for instance, have fewer options for doing so.
3. Integrity: Integrity is a key factor in an age dominated by fake news, greenwashing and all manner of social media nonsense. Act with integrity, don't promise too much. This is equally important for B2B and B2C brands.

How exactly do you build trust? Find out more in our introduction Building BrandTrust – How it's done 

6. Price reductions are not worthwhile – price increases more likely so

Sometimes, we recommend that a customer use a method that will result in lower sales. Sure, the first reaction is shock – but after taking a closer look they come to understand: For the sake of profit, it is usually better to accept lower sales than to reduce the price.

This simple example calculation shows what we mean:

• The second line shows: A price reduction of 5% would cut profits in half: from the original 10 million to 5 million Euro.
• The third line shows: With a 5% drop in sales (from 1 million to 950,000 units) profits only decrease by 20% to 8 million Euro. Because the variable costs also drop. That adds up to – with fixed costs remaining the same – higher profits than a 5% price reduction.

So the difference between the two options price reduction (profit: 5 million Euro) and sales reduction (profit: 8 million Euro) is a whopping 60%!

This is why we recommend: Remain firm, price reductions and discounts will ruin your profits. It's better to accept a decrease in sales. Protect your price! It sends a signal to the market because consistent pricing emphasizes your brand strength 

Don't be afraid to raise your price

If you want to raise your prices, your sales team may object on reflex: "Please, no, our sales will drop! We shouldn't give up the market share we fought so hard for!" We want to relieve you of that fear. Let's stick to our example from earlier: Imagine what would happen if you raised the price by 5% from 100 to 105 Euro. This would cause your sales to decrease, but at a rate you could cope with.

This is an important argument for realizing a price increase, for instance in annual meetings and customer negotiations. Stay firm!

In a webinar we taught on the topic of pricing, a participant asked "Don't you scare off potential customers if you raise your prices instead of lowering them?" We hear this question a lot and our answer is: You only scare off the ones that don't matter – those 20% of price-sensitive consumers that are gone anyway the second they can get it cheaper somewhere else.

Such purely price-oriented buyers should never be more than "by-catch". An yet, many companies woo them above all others, for example telecommunications providers that lure new customers with great bargains, while existing customers, whose loyalty and trust are really what counts long term, are left with nothing.

7. The higher the added value, the easier the pricing

How is a price calculated? In practice, many do it like this: Take your fixed costs and your variable costs, add a profit mark-up, and presto – that's your price.

You also watch the competition's pricing, and the "gas station phenomenon" kicks in: You look to see what the competition is charging and adjust your price accordingly. But that makes you dependent on the pricing of your environment. Intuition, your gut feeling, is consulted, too, with the question: So what would this "roughly" be worth?

But what is most rarely used as a measure for pricing is the customers' willingness to pay. How much would they pay? What subjective and objective benefit do they see, what value do they assign to the brand? It doesn't matter at all whether it is a B2B or B2C brand.

 

Those with a good positioning can ask for more

Ultimately, you are dealing with people who estimate the added value (see No. 4). Yes, in the tender business you try to systematize objectively and calculate the soft factors. But still, in our experience, the subjective benefit usually prevails if potential buyers can perceive it and trust the brand.

But the reality is that it is difficult for brands to be perceived by people. Let's take the example of water brands. The graphic shows the positioning of over 100 water brands. This is from our study Zukunftder Wassermarken (The future of water brands) , for which we used our KI method Performance Branding

On the left you see the water brands that position themselves on lifestyle, as stylish companions, such as Fiji Water and Viva Con Aqua. On the right are the brands that position themselves on "Nature and Region": Bad Brambacher for instance, and Adelholzer. Both these poles are good, because they show a clear positioning 

But in the middle, we see the "dead zone of interchangeability". If a brand is located there, it means: People have no clear image of it and don't perceive it. Hence, they also cannot appreciate it. The consequence for the company: no added value develops.

Water brands show why the brand is a perfect foundation for strong pricing: When consumers prepare their own tap water at home with SodaStream, a liter of mineral water costs about 0.32 Euro. For a water brand, they pay a lot more, an average of 0.77 Euro per liter (plus 140 %).

If a water brand is also clearly and strongly positioned thanks to its peak performances  and values, the price can be raised even more: According to our study, the top water brands charge an average of 89 cents per liter, meaning nearly 180 percent more than for home-fizzed tap water. That means: When consumers perceive a value – whether it's lifestyle or region and nature – they are willing to pay more.

This is ultimately what counts: You have to know what role and significance a brand is to take on in the lives of people. Only then will they perceive your brand and appreciate it. Only then does added value develop.

8. The ten Quick Wins

1. Condense your peak performances and the value they provide to their essence. Customers' attention span is limited, so you need it to transport your specific attributes.
2. Develop an unambiguous positioning with consistently repeating messages: With a smorgasbord of messages, you have no chance of being included in the relevant set.
3. Develop a storyline, in which your customer is the hero. This is how you create attraction and make sure your brand is noticed.
4. Develop an unmistakable brand style: Your brand must be clearly recognizable at first glance, even without a logo. Don't follow what the competition is doing.
5. Invest everything in building trust. A person who trusts does less thinking.
6. Do everything you can to offer something incomparable, otherwise the price wins.
7. What makes the sale is the added value perceived by the customer, not the price!
8. Avoid discounts: When in doubt, accept a drop in sales (it is better to risk a 5% loss in sales than to lower prices by 5%).
9. Build on your attractiveness: Awareness alone does not create a price premium.

10. Decide what you want your brand to stand for, otherwise it will end up in the death zone of interchangeability.



 

Author

Klaus-Dieter Koch

Managing Partner

Top Unternehmensberatung 2023: BrandTrust

Hattrick: We are also in the FOCUS Top Management Consultants ranking in 2023

For the third time in a row, we have been recognised as a top management consultancy by business magazine FOCUS in 2023. Once again this year, the excellent performance and memorable expertise of our consultants was recognised by both clients and colleagues.

We are delighted with this appreciation and would like to thank our clients and colleagues.

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