Is brand equity elastic? ~ Brand Mix

Thursday, January 8, 2009

Is brand equity elastic?

Jonathan Salem Baskin had an interesting post over the holidays titled: Holidays 2008: Price Cuts Eroded Value. I didn't buy the main argument which was (and I hope this is fair) that consumers are entering a new age of enlightenment where they will no longer be influenced by branding trickery.

But this quote got me thinking about brand equity elasticity:

"When Chanel kicked-off the October with an 8% or more price cut, it didn't offer more "value" to consumers as much as remove the "luxury tax" it normally charged for its products. Being charged less is not the same as getting more.

Does the premium that consumers are prepared to pay for brands vary depending on market conditions? Now that we're in a recession, will premium or luxury brands have to reduce prices not just because people have less money but also because the amount extra they are prepared for a brand name is also less? What Jonathan describes as a "luxury tax" might also be called a brand premium surcharge.

As with many of my posts, this one might be completely off-base so please set me straight if necessary.


Ron Shevlin said...

Your friend Mr. Baskin should read Buying In by Rob Walker.

It's very chic to claim that we're now a society of enlightened consumers who see through marketing manipulation and persuasion techniques.

For better or worse, that view is wrong.

Chris Wilson said...

Interesting theory.

"Does the premium that consumers are prepared to pay for brands vary depending on market conditions?"

Maybe so, but I wonder what the consequences of transitioning through these price fluctuations will be.

I see a lot of long term risks being taken for short term gains.

Tom Asacker said...

I'm not sure I'm following the point of the post nor the comments.

Of course consumers are becoming more enlightened and discerning with regards to marketing and marketplace value. And price reductions do not signal "value," they signal a deal at best and in many cases it conveys a following the herd mentality (e.g. lack of specialness) and/or desperation.

And yes, Rob Walker is correct in that products can be imbued with meaning through marketing and advertising, which in turn can add to their "identity" value for the consumer; especially products that consumers display to others during purchase and use.

However, as Baskin clearly articulates, if the consumer can not intuit said identity value and thus requires a "price cut" to entice them to buy, marketers have NOT done their jobs of providing that value.

The question then becomes, Could "better" advertising have created the identity value and preserved the price premium? Baskin thinks not, and I happen to agree. Marketers will have to work smarter and harder to add perceivable value to their brands in the future. Hopefully Detroit's automakers have finally figured this out.

Martin Bishop said...

The question I was posing was whether factors (such as the economy/market conditions)influence the premium that people are prepared to pay for brands.

If so, the current wave of discounting isn't so much a reflection of poor marketing as it is a reflection of changing attitudes driven by the recession.

Ben Kunz said...

I disagree with Tom Asacker's comment that if consumers require a price cut, marketers have not done their job.

Economist Richard Thaler noted decades ago that consumers require price framing -- a reference point by which they can determine if they are getting a good deal. Every product really has two prices, a higher "price A" by which you judge the value, and the "price B" you pay. If consumers judge the difference to be positive, they feel they get a good deal; if the difference is negative, it appears to be a "rip-off" situation.

Talbots is a luxury clothier that uses price framing brilliantly -- a $120 sweater is expensive, but if it is marked down 40% from $200, the woman shopper feels it is a good deal.

Marketers have always played this game, in many ways -- not always using discounts. Luxury goods seek to disguise the price differentiation by masking the first reference price. Gee, a diamond costs $3,000? Well, that could be a good deal, because as a consumer I do not have transparency into what the reference price is.

The story here is that consumers are bad at judging value, and so typically look for a reference to see if their deal is better or worse. Luxury brands disguise value by masking the reference price.

In a down economy, the mask begins to fall off. Diamonds that have been positioned as $3,000 icons of love that last forever begin to look more like shiny pieces of carbon.

So it's not that marketers are doing a worse job; but the outside inputs of information -- news about the economy, fear that one may lose her job -- create a new level of information that help consumers figure out the "real" reference price. The bottle of perfume that costs $80 suddenly looks like scented water worth 80 cents.

All of which is saying, yes -- luxury brands will take a hit, as the masks they present on pricing wear off.

Tom Asacker said...

Thanks for the clarification Martin. The economic news, market conditions, and people's personal net worth are making consumer more discerning. To Ben's point, they're taking more time to reveal the actual value behind the price masks.

However, I stand by my comment. Price is determined by perceived value taking into consideration the various alternatives. I certainly understand discounting as a marketing strategy; the perceived value thus being the hunt and the deal. However, I don't believe that was the premise of Jonathan's blog post.

Ultimately, a marketer's job is to build value, preference, and margin growth. If discounting gets them there, they're doing their jobs. Otherwise, they had better stop creating masks and start creating value.

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