How Price Reductions Impact Brand Equity

Branding Strategy Insider helps marketing oriented leaders and professionals like you build strong brands. BSI readers know, we regularly answer questions from marketers everywhere. Today we hear from Laura, a VP of Marketing from Atlanta, Georgia who asks this question about pricing strategy.

“Can price reductions impact brand equity?”

Thanks for your question Laura. The answer is not nearly as simple as the question implies. “It depends” is the most accurate two-word answer. It depends on the following:

  • Is the brand a premium segment brand, a mid-segment brand or a value brand?
  • What price premium does the brand currently command over competitive alternatives?
  • Was the brand perceived to deliver a poor, adequate, average, good or excellent value prior to the price reduction?
  • Is the price reduction a one-time event, a periodic event or a permanent reduction?
  • What is the pre-reduction price of the brand?
  • What is the proposed price reduction amount and percentage of the overall price?
  • Is the brand in trouble or is it hugely popular?
  • Is it a new brand that is attempting to penetrate an established market? Is it one of many brands in a highly fragmented market? Is it a legacy brand that has long since lost its cache?
  • What is the brand’s mind share and its market share?
  • In what channels is the brand distributed? Are they mostly discount channels, premium outlets, luxury boutiques, department stores, grocery stores, mass channels, convenience stores or some other type of channel?
  • Has the brand recently crossed any price thresholds that have significantly increased its price sensitivity?
  • What are the patterns of price increases and reductions in the product category in question?
  • Is the brand trying to manage demand through its pricing?
  • Is the price reduction a strategic long-term adjustment or a tactical short-term action to lift sales over a limited period of time?
  • Is the price reduction offered to all customers or just some customers?
  • Is the price reduction part of a price segmentation strategy?

As you might surmise from these questions, a price reduction can have any of the following impacts on brand equity:

  • It can INCREASE perceived brand value and brand equity (some brands)
  • It can INCREASE perceived brand value but DECREASE brand equity (some premium brands)
  • It can DECREASE perceived brand value and brand equity (many brands including many premium brands)
  • It can DECREASE perceived brand value but INCREASE brand equity (some super premium brands)
  • It can have NO IMPACT on perceived brand value and brand equity (some brands – if the reduction is small or imperceptible or no price threshold is being crossed or the price is already extremely low compared to competitive alternatives)

As you can see, pricing is quite tricky and there is no simple rule of thumb to link all price increases or reductions to definitive changes in brand equity. Having said that, our BrandInsistence brand equity measurement system recognizes “brand value” as one of the five drivers of customer brand insistence. For most brands, increased value leads to increased brand equity. But remember that “value” is a holistic perception that is based on the often subconscious ratio of costs to benefits. The costs can be in terms of 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 yet another separate pricing topic.

If a customer is largely convenience-driven, price reductions might have no impact on that person. Alternatively, if the customer is largely price-driven, a price reduction could have a significant impact on that person’s purchase behavior. Low prices could drive some category enthusiasts to try a new product or brand, while price reductions may have little to no impact on brand-loyal customers. Again, the relationships between price, perceived value, brand equity and sales are not always linear and cannot be solved by just one simple equation.

I hope this has helped you to think more deeply about the relationships between pricing, perceived value and brand equity.

We hope this help you build your brand Laura.

Do you have a question related to branding? Just Ask The Blake Project

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