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PepsiCo tackles 'magic' price points

News, 26 May 2015
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SINGAPORE: Global brands operating in developing countries can free themselves from the restrictions imposed by "magic price points" by developing a better understanding of the perceived value of their brands to consumers, according to PepsiCo.

As most transactions in these markets are on a cash basis, typically at a small store, brands have tended to focus on so-called "magic price points" linked to coinage availability as a way of growing penetration. The flip side is that brands then fear what will happen to revenues if pack prices are moved to a higher level.

PepsiCo set out to examine how it might optimally link brand equity and pricing strategy and chart a different path from the usual ones adopted to deal with raw material inflation and the discounted prices of rivals such as simply reducing pack size or seeking further supply chain efficiencies.

In Measuring pricing power of a global brand in an Asian market, a paper presented at the recent ESOMAR Asia-Pacific conference and available to Warc subscribers, the authors – Ruchira Jain, vp/consumer strategy & insights at PepsiCo India, Kamal Sen and Venu Gorti, CEO and evp respectively at Singapore's Cogitaas AVA, Singapore, and Don Sexton, Professor of Marketing at Columbia University in the US – outlined a holistic research method that had enabled them to achieve this aim.

Their approach was based on the concept of Customer Value Added, which is essentially the difference between the perceived value of a product or service and its cost per unit.

"This gives a very tractable measure of brand equity," they reported: "namely Perceived Value which is not measured through heuristic scores but statistically based on past purchases by all consumers."

From this they then developed two further metrics: Maximized Consumer Value, the highest value perceived by a brand's most loyal consumer; and Consumer Surplus Factor, a monetary measure of "satisfaction, or surplus, perceived over and above what we pay for it".

This enabled them to answer a number of questions, including whether to raise prices of its largest brands or to raise others in the portfolio, and, within a brand, to consider which SKUs/variants/regions have more pricing power.

The overall conclusion was that "investing in equity pays" in emerging markets.

"In a battle between products that invest in advertising and marketing and those that focus on low cost positioning, we have found that products that consciously build 'brands' tend to build higher consumer value, and thereby do have the license to operate at premium pricing," the authors stated.

Data sourced from ESOMAR

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