Nerd Alert: How Advertising Improves Pricing Power

Summary

The Marketing Architects Podcast Summary

Episode: Nerd Alert: How Advertising Improves Pricing Power
Release Date: January 16, 2025
Hosts: Elena Jasper and Rob Demars

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Introduction

In the latest episode of The Marketing Architects, hosts Elena Jasper and Rob Demars delve into the intricate relationship between advertising and a brand's ability to maintain and enhance its pricing power. Titled "Nerd Alert: How Advertising Improves Pricing Power," this episode dissects a comprehensive academic study to unravel how advertising influences consumer sensitivity to price changes across various brands and categories.

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Exploring the Study: Advertising's Long Term Impact on Brand Price Elasticity

Timestamp: [00:42]

Elena introduces the core study discussed in this episode: "Advertising's Long Term Impact on Brand Price Elasticity across Brands and Categories." Authored by Burke Adaman (Koc University), Kuhn Powells (Ozn University), Shuba Srinivasan (Boston University), and Mark von Hugh Lou (HEC Paris), the research examines seven years of data encompassing 350 brands across 39 product categories within fast-moving consumer goods (FMCG), including cereals, shampoos, and beverages.

Key Focus Areas:

• Price Elasticity Defined: The study defines price elasticity as the degree to which the price of a product affects consumer demand. A low price elasticity indicates that consumers are less likely to alter their purchasing behavior in response to price changes.

• Dual Impact of Advertising: Interestingly, the research highlights that both a brand’s own advertising and its competitors' advertising can decrease price sensitivity. This means that not only does a company's advertising help maintain its pricing power, but competitor advertising can also indirectly benefit a brand by increasing overall category attention.

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Hosts' Initial Thoughts and Assumptions

Timestamp: [01:11 - 01:27]

Elena acknowledges the impressive effort in pronouncing the authors' names and transitions to Rob's initial thoughts on the subject. She poses the question:

Elena: "What are your current assumptions about how advertising can impact a brand's pricing power?"

Rob: "I think a brand's equity definitely impacts pricing power. For example, when I go into Target and see high-quality generic products, I often believe that the branded item is worth the extra cost because I trust the brand."

Rob’s perspective aligns with the study’s premise that brand equity, bolstered by advertising, can enhance pricing power by fostering consumer trust and perceived value.

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Deep Dive into Study Findings

Timestamp: [01:27 - 07:08]

Elena: Highlights her excitement about Professor Powell’s active engagement on LinkedIn and her anticipation to discuss pricing power, a recurring theme on their podcast. She touches upon the debate surrounding advertising's effectiveness in allowing brands to raise prices without losing customers, setting the stage for a "myth-busting" session.

Study Insights:

1. Advertising Reduces Price Sensitivity:

   • Niche and Premium Brands: The study finds that advertising significantly lowers price sensitivity for niche (high-priced, lower perceived quality) and premium brands (high-priced, high perceived quality). Elena confirms Rob’s intuition, stating that advertising is especially potent in complex or highly competitive categories.

   • Impact Across Categories: Advertising in crowded or fast-growing markets is more effective in reducing price sensitivity compared to stagnant or less competitive ones. This is because advertising helps consumers navigate complex or noisy markets, enhancing their confidence in their choices and willingness to pay a premium.

2. Competitive Advertising Benefits All:

   • Both a brand’s own advertising and that of its competitors can lower price sensitivity. Competitor advertising increases overall category attention, indirectly benefiting all brands within the category by elevating consumer awareness and consideration.

3. Limited Benefits for Lower-Priced Brands:

   • For lower-priced brands, the study observed smaller or even negative returns from advertising. This is attributed to different competitive dynamics and consumer expectations in lower-priced segments, where price sensitivity remains high despite increased advertising.

Rob: Expresses his alignment with the study's findings, emphasizing the role of intangible brand values in not only selling products but also in justifying higher prices.

Elena: Surprised by the significant impact of advertising on premium brands, noting that many high-end brands, like Coach or Louis Vuitton, do not heavily advertise on mainstream platforms like television. Instead, they invest in sponsoring high-profile events or using niche channels to signal their brand's exclusivity and premium status.

Rob: Provides the example of Rolex, a high-ticket brand that doesn't typically advertise on television but makes strategic branding choices, such as sponsoring events like Wimbledon, to maintain its prestigious image.

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Practical Examples and Applications

Timestamp: [07:44 - 09:42]

Elena: Enhances the discussion by providing real-world examples of brands that fit into the study's defined categories and benefit from advertising in terms of pricing power:

• Niche Brands:

  • Tesla: Although Tesla is recognized for minimal traditional advertising, its strong brand presence and strategic visibility efforts align with reduced price sensitivity.

  • Peloton and Dyson: Actively advertise their innovative products, reinforcing their market positions and justifying premium pricing.

• Premium Brands:

  • Apple, Louis Vuitton, BMW, Mercedes Benz: These brands invest heavily in advertisements that emphasize quality, innovation, and prestige, thereby maintaining high price points.

• Specialty Foods and High-End Skincare:

  • Beyond Meat, Various High-End Skincare Brands: These brands utilize advertising to highlight their unique value propositions, catering to specific consumer segments willing to pay a premium.

• Competitive SaaS Categories and Craft Beer:

  • Pet Care Brands (e.g., The Farmer’s Dog): Engage in substantial advertising efforts to differentiate themselves in crowded markets.

Rob: Reflects on how advertising not only aids in making product choices easier for consumers but also empowers brands to command higher prices.

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Key Takeaways for Marketers

Timestamp: [07:08 - 09:42]

1. Strategic Advertising Enhances Pricing Power:

   • For niche and premium brands operating in complex or competitive categories, targeted advertising can significantly reduce price sensitivity, allowing for higher pricing without deterring customers.

2. Competitor Advertising as an Indirect Benefit:

   • Even when competitors advertise, the overall increase in category attention can benefit all players by elevating consumer awareness and setting higher price expectations.

3. Tailored Advertising Approaches:

   • Lower-priced brands may require different advertising strategies, as traditional advertising efforts might not yield the same reduction in price sensitivity and could potentially harm their price perception.

4. Brand Differentiation and Consumer Confidence:

   • Effective advertising enhances brand differentiation and builds consumer confidence, which are crucial for maintaining and increasing pricing power.

5. Metaphorical Insight:

   • Elena offers a memorable metaphor: "Advertising is like seasoning a dish. Your ads add bold spices that make your brand memorable, while competitors' ads sprinkle extra flavor, enhancing the whole category. For niche and premium brands, this is the perfect recipe to keep consumers savoring every bite, even at a premium price."

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Conclusion and Final Thoughts

Timestamp: [09:41 - End]

As the episode wraps up, Elena provides a curated list of brand examples categorized based on their potential to benefit from advertising in strengthening pricing power. She encourages listeners to connect on LinkedIn and leave a review if they found the episode valuable.

Final Insights:

• Impact of Advertising Varies by Brand Segment: Understanding where your brand fits within the niche, premium, or value segments is crucial in tailoring your advertising strategies to maximize pricing power.

• Holistic Category Growth: Recognizing that advertising not only benefits your brand but also contributes to the overall growth and attention of the category can inform more collaborative and strategic marketing approaches.

Rob: Concludes by appreciating the depth of the discussion and the practical implications for marketing strategies, highlighting the dual role of advertising in both selling products and empowering price positioning.

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Notable Quotes

• Rob Demars [00:24]: "I think a brand's equity definitely impacts pricing power. [...] I trust it, I believe that brand, and so I think it does impact it."

• Elena Jasper [06:31]: "Advertising is like seasoning a dish. Your ads add to the bold spices that make your brand memorable. While even competitors' ads sprinkle a little extra flavor, enhancing the whole category."

• Rob Demars [06:37]: "That was good. I think that's really interesting. [...] your ability to price a product. That's pretty cool."

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Key Resources

• Study Discussed: Advertising's Long Term Impact on Brand Price Elasticity across Brands and Categories by Burke Adaman, Kuhn Powells, Shuba Srinivasan, and Mark von Hugh Lou.

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Connect with The Marketing Architects

• LinkedIn: Marketing Architects
• Review: If you enjoyed this episode, please leave us a review to help others discover the podcast.

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Transcript Note: The podcast transcript provided covers approximately the first 10 minutes of the episode, focusing on introducing the study, discussing its findings, and providing practical examples. The summary encapsulates these discussions, presenting a structured and comprehensive overview for those who haven't listened to the full episode.

Transcript

[Rob Demars]

Nerd Alert. Learning is important, right?

[Elena Jasper]

Yes, exactly. What a bunch of nerds.

[Rob Demars]

Nerd alert.

[Elena Jasper]

Right? Marketing Architects. Hello and welcome to the Marketing Architects, a research first podcast dedicated to answering your toughest marketing questions. I'm Elena Jasper. I run the marketing team here at Marketing Architects. And I'm joined by my co host, Rob demars, the chief product architect of misfits and machines.

[Rob Demars]

Hello.

[Elena Jasper]

Hello. We are back with your weekly Nerd Alert. Every week I'll take a deep dive into academic marketing research and translate its complex ideas into simple, understandable language for Rob and of course, for all of you. Are you ready to nerd out, Rob?

[Rob Demars]

Nerd mode is activated. Let's do this.

[Elena Jasper]

All right, let's get into it. As always, we'll link the research we cover in the episode notes. This week I read a study titled Advertising's Long Term Impact on Brand Price Elasticity across Brands and Categories. This is by Burke Adaman from Koc University, Kuhn Powells from Ozn University, Shuba Srinivasan from Boston University, and Mark von Hugh Lou from HEC Paris. I worked very hard to pronounce all those names.

[Rob Demars]

I'm really impressed. That was really good, Elena.

[Elena Jasper]

Thank you. I've again, these people, they put so much work into these studies. I try to do my best to pronounce their names correctly. But before I get into it, Rob, I want to ask you something. What are your current assumptions about how advertising can impact a brand's pricing power?

[Rob Demars]

I think a brand's equity definitely impacts pricing power. I guess the example I would give is when I go into Target and I'm looking at a shelf with high quality generic products. Oftentimes I know those products are actually the same as the product with the fancy label. But I still associate that branded item as worth the difference in cost. Oftentimes just because I trust it, I believe that brand, and so I think it does impact it. Tell me I'm wrong.

[Elena Jasper]

No, we're. We're going to find out just how correct you are. So I was really excited to see Professor Powell. He's pretty active on LinkedIn and he shared this study a while ago. And I thought, all right, we got to talk about this on Nerd Alert because we talk about pricing power a lot on the podcast. Angela is very passionate about advertising's ability to improve pricing power. We've seen it for our clients. And so I believe that in my heart and soul. But I've heard some pushback and doubt from others about how effective advertising really is at something as important as raising your prices without consequence from your customer. So today we're going to talk about pricing power and maybe do a little bit of myth busting. So let's get into it. This study discusses the long term effects of advertising on a brand's price elasticity. So they dive into how advertising impacts how sensitive consumers are to price changes. And they also look at when and why advertising works to reduce the sensitivity. It's full of insights for marketers who might want to perfect their budgets and maximize how much they can charge a customer, because that's how you're going to be more profitable. But first, let's define a term. Price elasticity measures how much a change in price affects demand for a product. So a low price elasticity means customers are less likely to change their buying behavior when prices shift. And this study analyzed seven years of data from 350 brands across 39 product categories of fast movie consumer goods. So that'd be things like cereal, shampoo, beverages. And the researchers, they didn't just look at a brand's own advertising. They also factored in advertising from competitors in the same category. And here's where it gets really cool and nerdy. Both a brand's own ads and a competitor's ads can lower price sensitivity. So even competitors advertising can indirectly benefit your brand by drawing attention to the category as a whole. So some brands are doing the heavy lifting for others. So, Rob, advertising is especially effective at improving pricing power for certain categories. Can you guess what those are?

[Rob Demars]

I would think ones that have more margin in it, like higher ticket items because you just have that ability to put more brand imagery into the products and demand more from that.

[Elena Jasper]

All right, yeah. Well, I'm going to reveal the answer, tell you if you're right or wrong. But first I wanted to find some.

[Rob Demars]

Do you need like one of those buzzers?

[Elena Jasper]

Ah, sorry, Rob, that's so aggressive. No, you've been really right. You've been really spot on today. I'm impressed. So first again, define some terms. When they reference, do you say niche or niche? Rob?

[Rob Demars]

Personally, I say niche.

[Elena Jasper]

Niche. I do too. All right, so we're going to use that when they reference niche brands. What they mean are brands with higher prices but lower perceived quality compared to the average brand in their category. So that makes them different from premium brands. Those are high priced and high perceived quality. That's kind of what you were talking about, right, Rob, you're referring to premium brands. They also have value brands, those are low priced and high perceived quality. And economy brands, low priced and Low perceived quality. So here's what they found. Rob is right. If you're in a niche, complex or high priced category, advertising works wonders to reduce price sensitivity. On the flip side, if you're managing a lower priced brand, the benefits might be smaller or even negative because the competitive dynamics and consumer expectations differ. So. So advertising in crowded or fast growing categories helps lower price sensitivity more than in stagnant or less competitive ones. It's like advertising gives consumers a map to navigate complex or noisy markets. It helps them feel more confident about their choices and that often leads to a willingness to pay a premium. So niche brands, which again are higher priced but perceived as lower in quality, they saw the biggest return on advertising and reducing price sensitivity. Premium brands, like you said, also benefited, though a little less dramatically. And lower priced brands, like you said, they just didn't fare as well. They sometimes even saw negative returns. So to summarize for marketers, this study, it shows us that advertising does reduce price sensitivity, particularly for niche and premium brands in complex or competitive categories because it enhances brand differentiation and consumer confidence. And even your competitors ads can indirectly benefit your brand by increasing category attention and consideration. And now for our robgpt. Advertising is like seasoning a dish. Your ads add to the bold spices that make your brand memorable. While even competitors ads sprinkle a little extra flavor, enhancing the whole category. For niche and premium brands, it's the perfect recipe to keep consumers savoring every bite, even at a premium price. All right, what do you think? Did you follow?

[Rob Demars]

I like it, I like it. You know, I, I spent half this time thinking about niche or niche.

[Elena Jasper]

Oh no.

[Rob Demars]

And I think that I've said both niches just sounds fancier. You sound a little more intelligent. I need all the help I can get. That was good. I think that's really interesting. I think the overall premise of oftentimes why we're in marketing, it's to help you decide between one product or the other and the intangible value that you can add to a brand makes a difference not just in your ability to sell a product, but your ability to price a product. That's pretty cool.

[Elena Jasper]

Yeah. And I think I was a little bit surprised by it. Like sometimes I think we, if you think of a real premium brand, a lot of times they don't advertise a lot. Think about like I don't know, just like coach Louis Vuitton. Yeah. Like I don't see them. I'm not going to know what a premium, one of the premium fashion brands is, but Again, some of those brands, you don't see them as much on tv. It makes you think that maybe some brands that are on TV like a Tiffany are just raising the category for everybody. But I was a little bit surprised. I'm not so much surprised by lower priced brands. But I don't know. It's interesting for sure.

[Rob Demars]

100% always. You know, there's certain brand. We're just chatting now. Right. Rolex is really interesting to me because it's obviously that's a high ticket brand and you don't see them on television. But then like I was at LAX and they branded one of the clocks at lax. It was a Rolex. They use the Rolex thing around there and I'm like, what? What? It's just interesting. Like high end brands make interesting unusual choices or they'll do a tennis match. The Wimbledon. Wimbledon. Wimbledon. Wimbledon.

[Elena Jasper]

Wimbledon.

[Rob Demars]

Wimbledon. Thank you. Niche. It's very interesting how high and in high end brands usually have a lot of excess money to throw around and so they can make unusual choices. But what they. But they aren't. You're right, you're not really choosing to do television, they're doing high end magazines.

[Elena Jasper]

Well, I suppose that's. They're also spending a lot of money on advertising. So that's actually a good fact check that they might not be on, they might not all be on television, but they are sponsoring huge sporting events. I mean they're signaling they're very expensive. Ad.

[Rob Demars]

Yeah, right. It's almost like a flex to say, okay, we're going to own the clock at lax. Right, Right.

[Elena Jasper]

So one thing I did that I forgot to mention that could be helpful for people is I was wondering, like they talk about all these different types of brands like niche brands, premium brands are. You're in a complex category, a competitive category. Some examples. I asked ChatGPT for examples of brands in these categories based on how they define it. So these are brands that ChatGPT thinks would benefit from advertising. It could help them with their pricing power. The first one they said was Tesla which I thought was so funny because Tesla doesn't really like advertising. Peloton which they're a big advertiser. Dyson big, probably famous advertiser. Premium brands like Apple, Louis Vuitton, BMW, Mercedes Benz, specialty foods like Beyond Meat. I know they do some advertising. High end skincare. See that on TV quite a bit. Tech startups. So competitive SaaS categories.

[Rob Demars]

Yeah, interesting.

[Elena Jasper]

And then craft beer. That's kind of a high competition category. Pet care. Competitive premium market for stuff like the farmer's dog. And we know that they're massive TV advertisers. So if that helps people, those are kind of some examples. That's it for this episode of the Marketing Architects. We'd like to thank Taylor De Los Reyes for producing the show. You can connect with us on LinkedIn. And if you like the podcast, please leave us a review. Now go forth and build great marketing Marketing Architects.