What we know about pricing strategies

Source: WARC Best Practice, September 2020

Downloaded from WARC

Explores the most current thinking and reading on the topic of pricing strategies, examining their impact
on sales, profitability, and perceptions of the brand itself.

Pricing strategies can have a substantial impact on sales, profitability and market share. Pricing
strategies can be flexible and effectively segmented, with a focus on both the short term and long
term. An over-reliance on price promotion can have negative consequences on perceptions of the
brand and marketers should consider price elasticity when analysing the effectiveness of pricing
strategy.

Definition
Pricing strategies are the strategies that are put in place concerning price when selling a product or service.

Key Insights
1. Brands should try to stick to their pricing strategy during a recession, not discount

Discounting is tempting during a recession, particularly for brands trying to defend market share from lower-
priced private label or low-cost brands, but it creates downward pressure on margins. However, not all
consumers will trade down as purchase decisions will be driven by household budgets. Households with cash
flow constraints do without or delay purchases rather than trading down. Households with a reliable income and
some savings will give up experiential luxuries and trade down rather than going without, shifting more towards
private label. Financially secure households may shift purchases from self-indulgent luxury to something more
practical. Understanding customer budgeting will help brands determine how best to respond.

Rather than discounting by default, brands should get creative about pricing. Fast moving consumer goods
(FMCG) brands can consider adding value for the consumer through formats, innovation, pack sizes or ‘special-
editions’ around key selling moments. In response to the COVID-19 crisis, Coca-Cola is rolling out new pack
sizes and product offerings to meet differing consumer needs and Procter & Gamble is serving consumers with
relevant pack sizes designed to hit key price points for those who need to make week-to-week purchase
decisions. And Hershey’s.is looking at a range of different pack sizes and price points for Halloween to meet the
budget needs of different consumers.

Marketers can ask a whole series of questions around pricing to help brands rethink and reframe the value they
offer and set the right recession pricing strategy. These include:

Category purchase dynamics such as how essential it is, how emotional it is, how variable consumption is
Brand fundamentals such as values and principles, key drivers of value
Segmentation considerations looking at the most deserving and valuable consumers and what they need
Looking at the short-term and long-term to see what is needed to survive and the long-term impacts of
short-term actions

Read more in: The WARC Guide to Marketing in the COVID-19 recession, More than trading down: How
consumers really shop and buy during a recession and Pricing in a recession: Four factors for setting
strategy

2. Low-cost brands have more flexibility to weather downward category pricing pressure

During times of crisis, such as the spread of COVID-19 and likely associated recession, when consumer
spending can fall, low-cost brands are often positioned to take advantage. US “ultra-low-cost carrier” Spirit
Airlines plans to lean on its low-cost model in the current climate of fare reductions – a model built to deliver
profit performance at low price points, unlike its competitors. Like everyone in the airline industry Spirit is having
to reduce seat capacity to control cost but is also focused on providing the customer service people need at this
time - through additional health protection measures and fee-free cancellations or reservation changes.

Read more in: Will low-cost brands be more resilient against COVID-19? The case from Spirit Airlines

3. Premium priced offerings can drive sales growth in mature categories

Premiumisation is a strategy where a company converts some category volume to a higher price by delivering
new benefits consumers are prepared to pay more for. It is a strategy well-suited to categories with little room for
penetration growth and can also help mid-market brands under pressure as today’s consumers trade both up
and down. Premium priced offerings can be:

A price increase on the core offering accompanied by an upgrade which improves performance with no
trade off
Multiple similar offerings at different price tiers with discernible differences between them
The core offering in a premium priced format for a new usage occasion or channel
An added value offering that addresses the needs of consumers not fully satisfied by your core offering and
which can command a premium

Premium offerings should avoid pricing too aggressively to put off existing and potential buyers or leave them
vulnerable to lower-priced brands or retailer own label. At launch they should focus on selling at the intended
price point and approach price promotions with caution as evidence shows simple price cuts don’t attract new
buyers.
Read more in: How to grow via premiumisation and How to grow via premiumisation: Admap summary
deck

4. Premium pricing is the best strategy for new products to fuel category growth

A study of over one thousand successful launches in 38 categories globally found that all benefited the
manufacturer with 40-50% of sales won from competition. However, from a total category perspective only 46%
delivered category value growth. This is very rarely the result of attracting new buyers to the category. Driving
additional category purchase or volume was much more likely but premium pricing was the biggest factor likely
to drive category value growth – though it can limit the size of the launch.

Read more in: Innovating for growth

5. Getting pricing right can have a dramatic effect on profitability

The value of premium pricing is significant. A study by McKinsey shows that reducing costs improves a
company’s profits only marginally, whereas increasing the brand’s price improves profits dramatically.

Justifying higher prices is especially difficult for mass-market brands where lower prices are essential to
attracting mass audiences. However, brands can break out of this cycle and command a price premium provided
they stand out from the crowd by offering what Millward Brown terms a ‘meaningful difference’ to the consumer
that separates them from the competition. Boosting consumer perceptions of meaningful differentiation is
important and should not be undermined by poor point-of-sale or too much promotional activity.

Research suggests that brands can use the power of semiotic and sensory cues to cut through at a non-
conscious (System 1) level to boost premium perceptions. This could be from the product itself (e.g. De Cecco
Spaghetti has a distinctive structure that consumers find meaningful); but a distinctive pack structure can also
help.

Read more in: The cost of everything and the value of nothing, For premium brands with conviction, it’s
the product that talks, Millward Brown's three "secrets" for driving brand growth and Take a stand for
your brand

6. Elasticity can be a crucial metric for guiding pricing strategies

A myriad of metrics are used when making business decisions around marketing strategy, including awareness,
engagement, satisfaction and loyalty. Often neglected, price elasticity, a measure of the effect of a price change
or a change in the quantity supplied on the demand for a product or service, is also a metric that marketers
should consider. Price is a crucial gauge in the assessment of good marketing; price elasticity shows whether or
not a brand should take a more premium position, or not. And while consumers have come to expect price
promotions, these can damage brand value. Elasticity can be measured via consumer response metrics, which
can be obtained from several sources: finite difference analysis, econometric analysis, reach and frequency
models and market structure models.

Recently brands such as P&G, Coca-Cola, Whirlpool and Colgate Palmolive have all said their prices will need
to increase due to rising costs of raw materials; they will need to be exploring ways to encourage their
consumers to be more elastic on price.
Read more in: P&G Results: Where strategy must go next and Elasticity - Marketing's magic metric

7. Pricing strategies should account for both the short-term and long-term effects of
marketing

Long term strategic planning prioritises growing a brand for the future. For a company to sustain long-term
growth and profitability, it is important that it effectively executes decisions for both the short term and long term.
If used too heavily, short-term promotions and temporary price reductions can become permanent due to a
reduction in the consumer’s perception of the value of the brand. To avoid harming the value of the brand
businesses can look to balance short-term price promotion activity with long-term advertising strategy that is
devoted purely to brand messaging rather than price, building brand strength which in turn can foster greater
loyalty and growth.

Read more in: Long-term effects of marketing actions

8. Certain price promotion techniques can favour premium-product brands

Price promotion is a method that is frequently used by marketing and sales managers to increase sales,
however promotion of this nature may negatively affect consumers’ perceptions when it comes to premium-
product brands. Employing a framework for price promotion, direct-price reduction techniques such as a direct
discount have the strongest positive impact on sales, while price-promotions that customers are not familiar with
can harm a brand. Premium-product brand perception is least negatively impacted when brands use direct-price
reduction and indirect-price reduction with a precondition, such as requiring a customer to trade in an older
vehicle to receive a reduction on a new model.

Read more in: Do Price Promotions Help or Hurt Premium-Product Brands? The Impact of Different
Price-Promotion Types on Sales and Brand Perception

9. Changing context can reduce price elasticity and create opportunity for premium
pricing

Too often brands are only focused on the "-er" strategy – making something better compared to what already
exists. Changing the context in which the brand competes can lead to creating something new people will pay
extra for. An example is Red Bull which offers a 'more intense' experience in a smaller, premium-priced can.
Changing context has the advantage of also giving the brand the elasticity to stretch into new categories.

Read more in: Point of view: Revisiting elasticity

10. Pricing up is not the only response to cost pressures

Choosing a price positioning is strategic and in the face of cost pressure there are three ways for brands to
protect margins:

Make it smaller – This is easier in categories where contents can't be counted and don't have to fill the
pack. It's best to be open about it to minimise consumer backlash.
Make it cheaper – Understanding brand experience drivers will increase the chance of saving money
without compromising the brand promise.
 Put the price up – This can hit sales in the short term, especially if competition don't follow. But it's honest
and will maintain brand and product integrity and trust.

A fourth option is to do nothing. This will hit margins but could boost volume short term and loyalty longer term.
Companies with a portfolio could also respond differently across brands.

Read more in: Ensuring the price is right: product pricing in 2017

11. New business models are creating pricing strategies based on usage and occasion

Companies such as Uber, the car-hire firm, are challenging traditional businesses (and pricing) models in
several categories. Specifically, the Uber business model is an on-demand, personal service, where the price is
based on usage, not ownership. The business incorporates techniques such as ‘surge pricing’ which puts
occasions at the centre of its pricing strategy. Rather than targeting consumers who are willing and able to pay a
premium, a business model such as this targets occasions in which consumers of all means are price-indifferent.
They require service in a given moment, and price is therefore worth it on that occasion. However, surge pricing
can create negative PR for a brand so this strategy comes with challenges.

Read more in: The Uber-all economy: A challenge to traditional business models

12. Brand equity can play a key role in pricing strategies for developing markets

In developing markets consumers may develop more aspirational lifestyles, but they still remain very value-
conscious. The challenge then is for brands to command loyalty for customer retention in the face of rivals who
are heavily discounting their products. While the prevailing literature on developing markets focuses heavily on
building brands, there has been relatively less attempts made to link brand equity to pricing strategy.

Research by PepsiCo sought to understand the relationship of ‘perceived value’ of the brands relative to price.
Findings supported the case for equity-building investment, with a focus on increasing perceived value before
price in developing markets. Loyalty can be achieved through keeping price point well below perceived value.
Another study by Kantar in India found that bigger, more popular brands and brands with more SKUs were less
price sensitive. Bigger, more popular brands can earn more through a price premium, provided they have a loyal
franchise held together by a unique brand promise. Consumers use SKUs to balance their brand preference and
purchase expenses so brands offering more SKUs, including smaller sizes, allow greater choice to consumers in
price change situations.

Read more in: Measuring pricing power of a global brand in an Asian market and The Inscrutable Price:
The impact of price in India

13. The rise in personalisation also applies to pricing

With personalised reductions part of loyalty schemes, personalised pricing is on the rise. Already, price-
sensitive, technology-equipped consumers can locate the offer that suits them best. In a data-driven world,
marketers will increasingly use shared information to offer consumers personalised pricing and consumers use
their data as a bargaining chip.

Read more in: Lessons for brands in a post-truth 'me world'

More on this topic
WARC topic page: Pricing Strategy

WARC Talks 360: Pricing in a recession - setting the strategy

WARC Best Practice: What we know about premiumisation

WARC Best Practice: What we know about private label brands

Further reading
Advertising and promotional effects on consumer service firm sales: Media ad spend and quality
matter for driving restaurant sales

© Copyright Ascential Events (Europe) Limited 2020

Ascential Events (Europe) Limited
Americas: 229 West 43rd Street, 7th Floor, New York, NY 10036, United States - Tel: +1 212 201 2800
APAC: OUE Downtown 1, #44-03, 6 Shenton Way, 068809, Singapore - Tel: +65 3157 6200
EMEA: 33 Kingsway, London, WC2B 6UF, United Kingdom - Tel: +44 (0)20 7467 8100

www.warc.com

All rights reserved including database rights. This electronic file is for the personal use of authorised users based at the subscribing
company's office location. It may not be reproduced, posted on intranets, extranets or the internet, e-mailed, archived or shared electronically
either within the purchaser's organisation or externally without express written permission from Warc.