Price Power - The Hidden Metric Bridging Marketing and Finance
In boardrooms worldwide, marketers' comments are often overshadowed by finance colleagues. To speak the language of CEOs, marketers have to change their jargon. Awareness or consideration talk is nice, but when boards only care about the revenue generated and the cost of acquisitions, marketers need to find another slang.
Introducing price power - an economic concept that can bridge the gap between marketing efforts and business outcomes and offer you a valued seat at the board table.
Price power, defined as a brand or business's ability to raise prices without significant demand or market share loss, is an underutilized concept in marketing strategy. Simple to measure, easy to benchmark with competitors, and less fuzzier than ROI, price power should get more of your attention. Why? Warren Buffett famously stated, "The single most important decision in evaluating a business is pricing power" (Frazzini et al., 2013). And Warren Buffett is usually right.
At the heart of price power is the price elasticity of demand. This measures how sensitive your customers are to price changes.
Price Elasticity = (Change in Sales) / (Change in Price)
A coffee shop sells 100 cups per day at $3 each. After raising the price to $3.50, it now sells 90 cups per day. Change in Price: $0.50 increase Change in Sales: 10 cups decrease.
Price Elasticity = 10 / 0.50 = 20
This means for every $0.50 increase in price, sales decrease by 20 cups. When you check the revenue impact: before 100 cups x $3 = $300 after: 90 cups x $3.50 = $315. Even though they're selling fewer cups, revenue increased by $15. This shows good price power.
So, instead of overthinking brand equity metrics, why don't you simplify and try to understand how your brand pricing power impacts equity?
Others have done it with success:
- Apple: Despite premium pricing, Apple maintained a global market share of 18% in Q4 2023 (Counterpoint Research, 2024), showcasing remarkable price power. Few phones are more expensive than iPhones...
- Coca-Cola: An older study by Ailawadi et al. (2003) found that Coca-Cola's brand equity allowed it to charge a 28% price premium over private labels. In a hypercompetitive and high-volume market, every cent counts.
- Nike: The company's focus on brand-building resulted in an industry-leading gross margin of 44.3% in 2023 (Nike Annual Report, 2023). Despite recent hiccups in share performance, no one can threaten their #1 place in the global sports apparel market today.
What can you do?
To manage price power, execute regular price sensitivity analyses, invest in brand-building advertising at the expense of short-term promotions, and emphasize value creation in marketing communications.
By focusing on price power, you will demonstrate a direct impact on profitability and gain a stronger voice in potential boardroom discussions. This will bridge departmental gaps and grow marketing's share of voice in the organization.
Share your thoughts and experiences - let's start a dialogue on leveraging price power to drive business success and marketing influence.
/This article was inspired by Chris Burggraeve.