Procter & Gamble's UK managing director Irwin Lee is not alone in vowing to improve his company's marketing campaigns by moving away from "unsustainable" value giveaways. But to make that shift successfully is a big challenge.
When 56% of grocery products in the UK are sold on deal, according to IRI, brands that seek to reduce their reliance on price promotion face an inevitable volume shortfall unless they can first justify their ability to command a price premium. Pricing may be an important variable in the marketing mix, but it should not be abused to the detriment of the brand and profits.
The fundamental problem facing packaged goods marketers is that consumers have got used to buying their favourite brands on deal. While price promotions can produce large changes in sales volumes in the short-term, these benefits are, in the long term, often offset by changes in consumer behaviour. The use of price as an incentive to purchase encourages consumers to focus on price as a differentiator and switch between a repertoire of brands or wait until their normal brand is on sale before buying.
So how can marketers break out of this vicious cycle? Provided brands are seen as desirable choices, they can thrive at higher price points when they are well differentiated – when they have a meaningful, relevant, and valuable point of difference. This is often referred to as the brand premium. Millward Brown analysis of hundreds of consumer packaged goods brands finds that those with a meaningful difference command a price premium 13% higher than category alternatives and four times more likely to grow value market share than the average.
In this regard, P&G's Lee is right to propose a renewed focus on highlighting innovation in order to reduce the reliance on price promotion. He was explaining his ideas at the IGD Convention in Westminster in October. Promoting a new functional advantage is the most immediate and compelling way to justify premium pricing.
In the US, the introduction of tide pods proves that relevant innovation can command a premium price. Launched in 2012 with extensive marketing support, the innovative 3 in 1 liquid tablet captured more than 6% of the total laundry category, 70% of the unit-dose segment of the US laundry category and an estimated $500m in sales this fiscal year. It's having an equally good impact in the UK where it launched earlier this year as Ariel 3 in 1. IRI sales data shows that seven pods are sold every second and the 56.2m pods sold since July 2013, equating to £9.3 million in sales value.
Of course, the problem with "new news" is that it soon gets old. As Mark Murray, global consumer planning director at Diageo, notes in my latest book*, the challenge then becomes to "maintain the feeling of difference".
Cravendale, the dairy supplier, has done an excellent job here, even though the majority of milk is bought on price by shoppers. This allows the brand to command a significant price premium which in turn means greater revenues and profit margins than its competitors.
In his speech in Westminster, Lee also stated that P&G aims to use in-store and ecommerce, real-time marketing and turning big data into "smart data" in order to manage its brands better. However, in order to complement these short-term, behavioural metrics it will be important to track what is going on in consumers' hearts and minds, since the ultimate value of a brand is determined by the ideas, memories and feelings that reside in the mind of the consumer. To determine whether innovation and advertising is creating a predisposition to buy its brands over the longer-term, P&G will no doubt be combining attitudinal with behavioral data to get a complete picture of brand health.
Savvy marketers seeking to wean their consumers off the addiction to price promotion will remember that people are still willing to pay a premium for brands that add value to their lives and maximise the income stream at a price point that matches the value perception without lowering margins. If it's not balanced then the brand will end up losing profit and potentially enter a death spiral. That value may be tangible or intangible, but marketers do need to provide consumers with a ready justification for why they would pay more for the brand. Initially that will come through innovation, but thereafter marketing communication will be key to maintaining the feeling of difference.
Nigel Hollis is author of The Meaningful Brand: How Strong Brands Make More Money, and chief global analyst at Millward Brown.
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