Helen Edwards on Branding: The sensitive art of pricing

Helen Edwards on Branding
Helen Edwards on Branding

Marketers must use the rise in commodity prices as the impetus to re-engage with consumers.

Oscar Wilde defined a cynic as someone who knows 'the price of everything and the value of nothing'. Brand owners are giving a passable impression of the first half of Wilde's pen-portrait with their new-found volubility on the price of everything that goes into their products, and the percentage by which it has increased since the last time they looked, say, 15 minutes ago.

Hence we learn from Nestle that milk powder is up by 23% since November, and from Adidas that cotton has risen 30% already this year. Britvic, meanwhile, justifies a profits warning by explaining that PET, a packaging plastic derived from oil, is 'up 20% in the past month alone'.

The consensus is that this is a trend that will continue in one direction only. Under the circumstances it is only right that marketers, too, are sensitised to the price of raw materials, and that they think about the effect this has on the eventual cost to the consumer. Pricing is one of marketing's four Ps, after all.

For marketers, though, it is vital to think beyond price and to maintain an intuitive grasp on the value of at least one seminal thing: brand equity. In the inevitable struggle to find ways to trim product costs, marketers need to know when to declare that enough is enough.

This requires suppleness. Complete resistance to any change in formulation, size, country of origin, quality, levels of purity, supplier ethics or other factors that determine costs will render marketing a bystander in the race to keep margins up.

On the other hand, it falls to marketing directors to be the calm, firm voice in the boardroom when they sense that short-term repair to the bottom line will lead to long-term damage to the brand. The question is, how far can the brand bend and not break?

There are signs that some big-name brands are already close to that critical point. Kraft, for instance, has run into a media storm for reducing the size of its Cadbury Dairy Milk bars from 140g to 120g shortly after pushing through a round of price increases.

Marketers making a stand to uphold brand qualities will nevertheless face a grilling from finance directors on how they might improve margins in the longer term.

The answer, as with most things in marketing, is that there is no easy answer. Innovation is the key, and everyone knows the effort and commitment that must take.

There is, however, both a principle and an example to be guided by. The principle is that if you want to be less rocked by commodity prices, it helps to decommoditise. Add value through innovation that makes the commodity price a shrinking factor in the overall product cost.

A prime example is Nespresso. Through these little capsules of high-quality coffee, Nestle manages to charge up to 10 times the price per cup that rivals do for unground beans.

Consumers love the delivery system and are happy with the value that Nestle adds beyond the raw commodity. Nespresso is rewarded with a $3bn business that is posting growth of 20% a year, with planned extensions into high-margin cappuccino and tea.

For imaginative brands, rising commodity prices will be a spur to find new ways to thrill consumers.

As for those who go the other way, with a product trim here and a price hike there, hoping no one will notice, well, the word 'cynical' springs to mind.

Helen Edwards has a PhD in marketing, an MBA from London Business School and is a partner at Passionbrand, where she works with some of the world's biggest advertisers

30 SECONDS ON ... Rising commodity prices

It is the subject on everyone's lips, affecting sectors as diverse as automotive and beauty.

- Analysts believe that continued turmoil in the Middle East could push up the price of a barrel of oil beyond the record high of $147 set in 2008.

- In February, cotton jumped to a 150-year high. At $1.90 per pound it is more than double what it was a year ago and just ahead of the record price it hit during the American Civil War.

- Chocolate manufacturers have been hit by a triple whammy, with cocoa, sugar and milk prices all up by more than 10% in a single quarter.

- The price of cocoa hit a 33-year high of £2700 a tonne last summer. A London hedge fund manager, Anthony Ward, earned the nickname Chocfinger after placing the biggest order the Liffe exchange had seen in 14 years, gambling that the price would continue to rise.

- Coffee futures are at 14-year highs, with a 109% increase in the past year. Meanwhile, tea auction prices have soared by 16% since the beginning of 2011.

- The price of chicken in supermarkets is set to soar, as the price of corn, which is used to feed the birds, has risen by 85% since 2008.

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