Setting Prices to Build Brand Equity

Brand equity refers to the value of a brand and is determined by consumers’ perception of the brand. Brand equity can be positive or negative. If consumers think highly of a brand, it has positive brand equity.

On the other hand, if the brand consistently under-delivers, fails to live up to consumer expectations, and generates negative word of mouth, it has negative brand equity. Simply put, brand equity is the reputation of a brand.

Pricing is the one strategy that moves the least as a strategy. If it moves at all. And that in itself is strange; knowing that it is the most impactful element in a company’s revenue delivery.

Price of a product or service is an important signal sent to the consumer. It is and rightly should be a supporting lever to the equity of the brand. It is a signal that labels whether your product is cheap, affordable, expensive, exclusive, for you, not for you, for everyday, for special occasions etc. Consumers’ psychology is such that price comes with a lot of baggage based on previous experience with your product, or potentially previous experience with a competitive product. It is immediately put in the wider competitive set, and, relayed back to money available in the wallet (our on the visa) at the time of purchase. All of this makes price setting a complicated matter.

Power of Pricing

Pricing at both ends of the strategy spectrum can affect brand equity in different ways. Premium pricing is the principle of setting a high price point to reflect the product’s exclusivity and quality. With niche brands, such as Chanel, Mercedes Benz or Rolex, the price is an aspect that the customers of the brand enjoy. It adds meaning and value to their purchase and sets the product apart from its competition. This makes the pricing strategy an important and integral aspect of the product’s brand equity. If the product doesn’t have any other strong differentiators, however, lower prices are likely to sell better than more expensive ones.

Everyday Low Pricing

This pricing strategy is the official positioning of most grocery store chains. Walmart successfully follows this strategy, which is imitated by stores in other countries. The chain’s approach of profitable and sustainable price differentiation has become a winning strategy and created significant brand equity, positioning the company as a low price, high value retailer. In addition, brands that successfully move into developing markets with a large number of less affluent customers, such as China and India, have their brand equity directly affected by the affordability of their products to the target market.

Discounted Pricing

Businesses usually adopt a strategy of differentiation or price leadership. Differentiation works for companies operating in luxury or niche markets, while price leadership works for discount stores. The effect of a discount or competition pricing strategy can create an image of second-rate products, which could have a negative effect on the brand’s equity. For example, Europe’s leading low-cost airline, Ryanair, created new routes to smaller airports to save on landing fees, which serve areas not covered by traditional airlines. This alienated some customers, but gained brand equity for the company in other target markets.

Value based pricing

Value-based-pricing is much more complex than any other pricing strategy. You need to understand consumer price psychology before you can make a call. And that leads to a need to change systems that lead to pricing decisions dramatically.