Pricing is one of the core building blocks of a brand strategy and is becoming an edifice towards creating ‘brand value’. Pricing impacts brand dilution. The strength of a brand’s pricing strategy not only determines the volume of sales but also sets a brand’s image. This image governs customer loyalty, customer retention and the churn rate.
In order to gain customers quickly from a number of brands, apply the penetration pricing strategy. This strategy produces fruitful results in the initial phases of the business. But in the long run, it causes massive revenue leaks.
In today’s blog, we will understand how pricing impacts brand dilution and other aspects of the brand value.
The Domino Effect
When a brand uses penetration pricing, they drop the prices of their products way below the competitive prices, at times breaking their cost analysis books. This means they begin to sell at exuberantly low rates by giving discounting and promotions. Although it attracts a huge number of customers in the beginning, over a period of time, it positions itself as the brand that sells at the lowest rates. According to market research, 76% of consumers believe that offering too many discounts or promotions can negatively impact a brand’s reputation.
Such a strategy causes gigantic leaks thereby leading to the fact that pricing impacts brand dilution. When the brand sells at the lowest price points, they are already suffering a loss. The loss of revenue impacts other aspects of the company. A study conducted by McKinsey & Company found that excessive use of promotions and discounts can lead to a 30% reduction in profit margins. It may run well for the first few months, but what happens when they run out of funds? After spending a large portion of the funds on purchasing the goods and acquiring customers, the brand also needs to retain customers.
And the retention rate depends on other factors like customer service and user experience. Not to mention the constant offers that attracted the customers in the first place. But if the pricing has been set to the bare minimum, it becomes impossible to increase it without upsetting the customers. Therefore the smarter brands with mature teams and partners backed with data intelligence develop value-driven dynamic pricing and discounting approaches.
Let’s look at a detailed analysis of brand dilution due to incorrect pricing.
Adverse Effects of Incorrect Pricing
Once the customer becomes accustomed to paying the lowest possible price, they will refuse to pay a higher price for the same product. Apart from that, there are other adverse effects like –
#1 Attracting Highly Price Sensitive Customers
When a company continuously offers low price points on products, they are bound to attract price-sensitive customers. These customers have high price elasticity. They are unwilling to pay a higher price for the same product and never loyal to a particular brand. This means that, presumably, “loyal customers” of a brand will be those who are only willing to pay the lowest amount. And if the prices increase, these customers will jump to another brand in a blink of an eye.
#2 Inability to Increase the Prices
When the brand has established a specific identity of charging a low amount, customers expect that from it. If the prices increase, the customer churn rate will become extremely high. The shoppers will begin to look for other alternatives instead of buying from the brand that often sells low-priced products.
#3 Poor Brand Image
Since the brand has created a certain identity of selling low-cost products, customers always expect them to sell at the same price. This projects a poor brand image. Even if the quality might be great, the low prices will never allow a brand to improve the prices of the products.
#4 High Customer Churn
When a brand constantly sells its products at low cost, customers expect the pricing to be the same all through. And if the brand suddenly increases the prices or shows different prices to different shoppers, it breaks the customer’s trust. This results in a high customer churn rate. Buyers only turn to a brand when they wish to shop for extremely low prices. Incorrect pricing not only increases the churn rate but also decreases the customer retention rate.
AI-Powered Pricing Solution to the Rescue
Selling products at a low cost is not necessarily the RIGHT pricing strategy. Every brand, especially in the Food & Beverage industry, has to be extremely strategic about their pricing. Since most customers are hyper-aware of price comparison, setting competitive prices is necessary.
And the most effective way to do this is by using an AI-powered pricing solution. There are several reasons why smart Brands and Retailers go with data intelligence and automated software for pricing. These intelligent bots are programmed to recommend prices based on – competitive intelligence on current prices, customer behaviour, in-depth market research, historical data and so on. Automated SaaS products estimate price elasticity at SKU levels, and can help retailers make informed decisions about pricing and promotions, and can help them to maximize sales and profitability.
When it comes to pricing, brands cannot go with the ‘One Size Fits All’ approach. Each product needs to be priced separately, and the prices must be optimized according to the demand. BRIO, Sciative’s AI-Powered pricing solution, gives price recommendations every two hours. It constantly checks the competitor’s prices and the previous sales history of the brand and creates price reports every four hours.
Due to its speed and frequency, BRIO enables brands to automate their pricing with 99% accuracy. This allows business owners to leave pricing to the bots while they focus on scaling their business.
To avoid brand dilution due to incorrect pricing, Book a Free Demo of BRIO – an AI-powered pricing solution for brands or contact our pricing experts at email@example.com.
2 thoughts on “Brand Dilution Due to Incorrect Pricing”
Thanks for this insightful article. It’s interesting to see the impact of pricing psychology on brand value:
There is definately a lot to find out about this subject. I like all the points you made