The Influence Of Discounting On Model Fairness
Brand Strategy Insider helps marketing-oriented executives and professionals like you to define and increase brand value. BSI readers know that we regularly answer questions from marketing-oriented executives and professionals everywhere. Today we hear from Stefanie, a Marketing Vice President in Frankfurt, who asks this question about the impact of discounts on brand value.
“There is a strong tendency to lower the price of our brand. What impact could this have on brand equity? "
Thank you for your question Stefanie. The answer is nowhere near as simple as the question implies. "It depends" is the most accurate two-word answer. It depends on:
- Is the brand a premium brand, a mid-range brand, or a value brand?
- What markup does the brand currently have over competitive alternatives?
- Was the brand rated poor, fair, average, good, or excellent before the price cut?
- Is the price drop a one-time event, a periodic event, or a permanent reduction?
- What is the brand's pre-reduction price?
- What is the proposed discount amount and the percentage of the total price?
- Is the brand in trouble or very popular?
- Is it a new brand trying to break into an established market? Is it one of many brands in a highly fragmented market? Is it an old brand that long lost its cache?
- What is the mind share and the market share of the brand?
- In which channels is the brand sold? Are they mainly discount channels, premium outlets, luxury boutiques, department stores, grocery stores, bulk channels, convenience stores, or some other type of channel?
- Has the brand recently crossed price thresholds that have significantly increased its price sensitivity?
- What are the patterns of price increases and decreases in the product category in question?
- Is the brand trying to drive demand through its pricing?
- Is the price drop a strategic long-term adjustment or a tactical short-term measure to increase sales over a limited period of time?
- Will the price cut be offered to all customers or just some customers?
- Is the price cut part of a price segmentation strategy?
As you can guess from these questions, a price drop can have any of the following effects on brand equity:
- It can INCREASE perceived brand equity and brand equity (some brands)
- It can INCREASE perceived brand equity but DECREASE brand equity (some premium brands)
- It can DECREASE perceived brand equity and brand equity (many brands, including many premium brands).
- It can DECREASE perceived brand value but INCREASE brand value (some super premium brands)
- It MAY have NO EFFECT on perceived brand value and brand value (some brands – if the reduction is small or imperceptible, or if no price threshold is exceeded or the price is already extremely low compared to competitive alternatives)
As you can see, pricing can be complicated and there is no straightforward approach to linking all price increases or decreases with final changes in brand value. However, the Blake Project's BrandInsistence brand value measurement system recognizes “brand value” as one of the five drivers of customer brand insistence. For most brands, an increase in value leads to a higher brand value. Remember, however, that “value” is a holistic perception based on the often unconscious cost-benefit ratio. The cost can be related to time, money, or some other scarce resource. The benefits can be functional, emotional, experiential or self-expressive. And perceived values can also be influenced by reference prices, which is another separate price issue.
If a customer is largely focused on convenience, then price cuts may not affect that person. Alternatively, if the customer is largely price-driven, a price cut can have a significant impact on that person's buying behavior. Low prices might encourage some category enthusiasts to try a new product or brand, while price cuts might have little or no impact for branded customers. Again, the relationships between price, perceived value, brand equity, and sales are not always linear and cannot be solved with just a simple equation.
Hope this has helped you think deeper about the relationships between pricing, perceived value, and brand equity.
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