Ignorance is not bliss. Academic research shows that barely 10% of CEOs are selected from marketing’s ranks and, even in top CPG companies, less than 20% of CEOs rise from marketing. Worse, less than 3% of a company’s board roles are filled by people with a marketing background. So much for the voice of the consumer being represented at the highest strategic body of a company.
Over the last few decades, marketers have ignored three of the original four Ps of Kotler’s marketing mix, focusing on promotion alone. Product tends to be led by research and development or by engineering and place by sales. And most dramatic of all - pricing by sales and finance. Not having a seat at the table of pricing is a highly critical issue for marketers in today’s acute times of inflation.
With spiraling costs and supply constraints, pricing power, or the lack thereof, determines the profitability future of the company. Inflation is really a marketing excellence acid test.
The existential financial philosophy guiding marketers is to create brands with Sustainable Pricing Power. The CMO needs to think more like a CFO and CEO, and like an external investor, ensure the company’s pricing decisions reflect the true relative strength of the brand.
The traditional why of marketing – as defined by marketers – is all about solving existing or unmet consumer needs and wants and to drive demand. While correct, this definition has always remained a black box for finance, resulting in endless discussions on budgets and ROI. If we define success as the ability to build sustainable pricing power, marketing and finance can connect in a way all can see and feel. It is marketing effort outcome-centric and linked to profit and loss. For Warren Buffet, pricing power is the single most important factor that drives investment decisions. He defines it as the ability of a brand to systematically raise its prices without curtailing demand or losing share to a competitor.
The best marketing-driven companies invest in the creation of long-term (in)tangible brand assets and emotional bonds in the minds of customers to create willingness to pay (WTP), and then find effective and efficient ways to monetize these assets in the short term. The closer the company can bring their real net pricing to the WTP, the lower the consumer surplus, and higher the possible margin for the company.
For Wall Street, a brand’s real earning potential is based on the net present value (NPV) of its future cash flows, potentially supplemented with a terminal value in case of a transaction. The more a brand can demonstrate sustainable pricing power underpinning these cash flows, the stronger it will be perceived. Importantly, pricing power not only impacts the topline but also dramatically affects a company’s margin potential by lowering costs. For example, banks will offer debt at lower interest rates, investors will buy shares at higher prices and lower cost of equity, and regulation compliance (like insurance) may be cheaper for stronger companies.
Some do it better than the others
Netflix and Disney have demonstrated pricing power consistently by increasing prices while growing the subscriber base. This illustration from the Capital Group shows how certain industries possess greater potential for pricing power.
Learn from online gamers - measure outcomes risk free
Pricing dynamics are quantitatively trackable. They measure the outcome of all the hard work a company puts in the creation and delivery of its goods and services. Pricing does not measure marketing inputs (TV advertisements, social media campaigns) or outputs (TV gross rating points, clicks, impressions). Billions of impressions only matter if they translate into monetization. Pricing power is where rubber meets the road, for marketers and for the entire company. To note, pricing power needs to be sustainable. Research has amply demonstrated that the best companies add value to all stakeholders in society, not just to shareholders. A good proxy for this today is Environmental, Social, and Governance (ESG) ratings.
Technology is knocking on every door and marketing can focus on the ‘who’ and the ‘what’ by leveraging digital technologies. It is now possible to create virtual models of customers, products, processes, resources, and eventually a metaverse of sorts with digital twins as the building blocks. Marketers can create different self-learning simulation models by combining real-time and historical data to help predict best possible product bundles and pricing. This ability to understand the market impact is key to building sustainable pricing models without risking material loss in the physical world, and to reduce investors buyer’s remorse.
So, if you are a marketer, ask yourself: how good is my company in building sustainable pricing power? Am I sitting at the right table?