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September 28, 2021

By Nigel Hollis

In a previous post I detailed why I think that the basic recipe for marketing success needs to be easy to mind, easy to find, and easy to pay. A new paper in the Journal of Marketing provides more evidence that pricing power matters, particularly when it comes to future profits.

Without rehashing the whole missing dimensions of brand building post, let me just restate my basic argument. Too many marketers focus on driving short-term, volume sales at the expense of long-term, sustainable growth. Size matters in marketing but so does the price point at which your brand sells. We need to extend the basic recipe for marketing success to be easy to mind, easy to find, and easy to pay.

An important function of marketing is to make it easy for people to pay the price asked. No second thoughts, no checking competitive prices, no delaying in case something better comes along. Easy to pay could be as simple providing access to a delayed purchase app like Affirm, Sezzle, or Klarna, but the biggest influence is likely to come from building perceptions that the brand is worth the price asked. If people perceive that a brand is different from the competition, they will be more likely to pay the price asked for it.

"Examining why and when market share drives profit" by Abhi Bhattacharya, Neil A. Morgan and Lopo L. Rego, analyzes data on 244 individual, U.S. firms in a wide variety of industries across 14 years. Importantly, their analysis seeks to explain next year's profit (t+1) based on this year's variables (t). So, never mind the arcane language of academia and statistics (you can find a more digestible summary here), we are already off to a good start in trying to explain future profits, not just applying 20/20 hindsight.

Market share is a measure of the overall competitiveness of the brand, and as such used to by marketers, managers, and investors to keep track of a company's overall performance. But there are two commonly used types of market share, and it turns out that one is more predictive of profit than the other.

  •     Volume market share tells you what percentage of overall category sales your brand captures within a specified time frame.
  •     Value market share tells you what percentage of the money spent on the category your brand captures within a specified time frame. I tend to think of value share as volume market share weighted by the average price paid for the brand.

So, the difference between volume and value share is the price paid and that is why the paper finds value share has a causal relationship with future profit and volume share does not. If nothing else, that finding alone suggests that managers who only worry about driving volume with no reference to the price paid are shooting their company in the foot.

Particularly for closely competitive markets, where the product is easily substitutable, attention tends to focus on volume market share and price gets used as a lever to drive sales, irrespective of its likely impact on profit. This tendency only gets exaggerated when retailers make driving category volume a priority and demand regular price promotions. However, a supplementary finding from the paper is that lowering prices to drive sales volume has a negative relationship with future profits.

From a brand marketing viewpoint, this analysis confirms the importance of understanding how to best support a brand's price point, rather than simply driving more sales. Both are important to sustainable, financial value growth, but the perceptions that help justify a brand's price point are very different from those that drive volume. In short, brand salience has no relationship with price paid, perceptions that a brand is different in a good way do.

The new paper by Abhi Bhattacharya, Neil A. Morgan and Lopo L. Rego is yet another reminder that price is an important driver of longer-term financial success. As such, it provides further support for one of my missing dimensions of brand building. Focusing only on growing volume market share risks undermining the long-term financial viability of a brand.

However, to only focus on the importance of value market share over volume is selling the paper short. For a review of what lies behind value market share check out my new post on AskNigelHollis.com or read the original paper, which you can find here.

 

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