Reilly Newman | As mentioned in our article “Pricing Your Brand”, we cover the fact that as a brand you have choices when it comes to your pricing strategy and these pricing decisions must be inline with your brand strategy.
In this article we are focusing on pricing power and how it can be encouraged through your brand.
A pitfall for many businesses (and a major red flag for businesses who think they have a brand) is the lack of pricing power.
What’s Pricing Power?
Pricing power is an economic term that can be influenced by demand, supply, and uniqueness of the product/solution.
Ex: A business with weak pricing power will lose demand if they raise their prices.
Understanding the sheer power of pricing power, one can see how this relates to a brand. Just as Nike, Supreme, or Prada increase the perceived value of a garment just by putting their brand on it, Starbucks is able to charge significantly more for a beverage than the same one at a local coffee shop. In the majority of cases, it’s not that the supply is limited (like limited edition items) or the demand is overbearing, but the brands have positioned themselves in a way to increase the perceived value. Just as a pair of sunglasses could retail for $40-60, but if they were worn by Steve McQueen or Elvis, what would they sell for?
The emotional connection humans make with a famous person to a product (if associated) drives the perceived value much higher. This same trick happens with brands when they influence the pricing power.
Naturally with power comes great responsibility. This is why pricing power, once captured, can be a great tool for increasing a business’s profitability. By increasing the value delivered through a product or service, the brand is able to increase pricing based on the new perception. The “ROI” on a strong brand that can drive these types of results can be limitless. Especially when you consider the increase in profits (from pricing power) without having to cut expenses or increase volume.
As recorded by McKinsey, “a price rise of 1%, if volume remained stable, would generate an 8% increase in operating profits—an impact nearly 50% greater than that of a 1% fall in costs such as materials and labor and more than 3X greater than the impact of a 1% increase in volume.”
Pricing power is one way a strong brand can increase your pricing to directly impact your profitability.
