What we know about pricing strategies

Source: WARC Best Practice, July 2019

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. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. Human psychology can form the basis for pricing strategies

Behavioural science can offer insights that can inform pricing strategies. The ‘Goldilocks’ technique, whereby a
brand introduces a third and higher-price option into a category makes the lowest-priced item appear cheaper
and so encourages the average shopper to veer towards the mid-priced option. The ‘anchoring’ technique,
which encourages shoppers to compare two prices at once i.e. original cost and discount cost, makes the lower
price appear like a good deal. Similarly, ‘hyperbolic discounting’ whereby consumers pay in small instalments
over time as opposed to a large one-off payment (“buy now, pay later”) softens the approach to purchase and
avoids overwhelming the consumer.

Read more in: New ways to understand consumers: Insights from the MRS Creativity Lab

10. 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

11. 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

12. 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

Further reading
What we know about private label brands

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