The Role of Price for Premium Brands - The Case of the Automotive Industry

Table of Contents

1 Starting situation

2 Definitions
2.1 Pricing
2.1.1 Pricing as part of the marketing mix
2.1.2 Pricing approaches
2.2 Brands
2.2.1 Role of the brand
2.2.2 Premium brand
2.3 Pricing of premium brands

3 Pricing of premium cars
3.1 The case of BMW - History, structure, goals
3.2 BMW in context of other companies in the automotive industry
3.3 Pricing of premium cars

4 Synopsis - What does the case of the cars say about the

theory of premium brands and in what way is it special

References

Appendix

Table of Figures

Figure 1: Customer Value

Figure 2: A brand is more than a product

Figure 3: Drivers of premium and volume brands

Figure 4: World market for premium cars

Figure 5: BMW’s blue-white logo

Figure 6: BMW R32

Figure 7: BMW 303

Figure 8: BMW 318 “Mille Miglia“

Figure 9: BMW R24

Figure 10: BMW 501, 503 and 507

Figure 11: BMW Isetta, 600 and 700

Figure 12: BMW present product portfolio (cars I/II)

Figure 13: BMW present product portfolio (cars II/II)

Figure 14: BMW present product portfolio (motor cycles)

Figure 15: MINI present product portfolio

Figure 16: Rolls-Royce Phantom

Figure 17: Mercedes-Benz S-Class

Figure 18: Mercedes-Benz SL

Figure 19: Audi A8

Figure 20: Porsche 911

Figure 21: Lexus LS

Figure 22: Citroen C6

"Any damn fool can put on a price reduction, but it takes brains and perseverance to create a brand."

David Ogilvy¹

1 Starting situation

Today, many markets have reached such a degree of saturation that market potential is often virtually exhausted. Increasingly, growth can be achieved only at the expense of competitors. Increasing internationalization and the market entry by new competitors result in brand and product inflation. Dramatically shorter product life cycles and constantly accelerating product aging are another challenge for companies that they must deal with.²

Hence, in order to make a company’s products stand out from the diverse range available, suppliers are attempting to hone competitive edge through increasing differentiation of their brands, emphasizing how they meet the specific needs and wants of their target customer groups and market segments. The overall goal of this approach is to build up brands that are unique in the market place - brands that promise a unique value. A strong brand can reach high rates of loyalty among existing customers; it can “more easily” gain new customers, due to its characteristic position; and it can therefore charge a premium price.

Marketers have several means to work with in order to reach this goal. Gener- ally, the corporate strategy “might specify a premium position or a mass- merchandiser/discount approach. These obviously have direct impact on the pricing”³. Price is only one of the marketing variables, but for the case of pre- mium brands it is important. The pricing position is one determinant for the development of a brand identity, incidentally, not only among customers and potential customers, but also among society, employees, etc.). As part of the company’s target market and positioning objectives (that largely determine the pricing strategy) price reflects the quality of the branded product and likewise the prestige that the user gains through this brand.

In this paper it will be shown, which role pricing plays in the brand concept of premium cars and what the case of the cars says about the theory and practice of premium brands.

2 Definitions

The American Marketing Association (AMA) defines marketing as “the process of planning and executing the conception, pricing, promotion, and distribution of ideas, goods, and services to create exchanges that satisfy individual and organizational objectives.”⁴In short terms, marketing has certain means to create value, both for customers and for the specific company.

For the company, this value might be profitable customers, valuable customer relationships, effective and efficient use of its resources, and in the end the ability to gain profits in order to survive or even to grow in the future.⁵

In order to create distinguishable value for customers differentiation is crucial, as already mentioned in the introduction. This value must be unique, i.e. sepa- rate the company’s offer from the competition, and it must be sustainable over time. Increasingly, marketing managers realize that it is difficult to compete just on product or service differentiation.⁶In the end, it is not the product or service the customer has a relationship with - it is the brand, “the emotional tie the customer has with what he or she perceives to be the value, benefit, and, yes, even psychological comfort that a strong brand brings to the marketplace”⁷.

Hence, in order to create strong brands that deliver meaningful and long-term value to customers, the marketing view should not be too product-centric, be- cause such a product position could be too similar to the positionings of com- petitive products. Marketing must be more basic, it “must conceive of an idea that could make the [corporate] strategy work in the mind of the consumer (cus- tomer)”⁸- the brand concept⁹. The brand concept drives consumer thinking.¹⁰ “The concept is not merely a positioning that highlights aspects of the product. In a sense, itisthe product. It is the idea that defines how the consumer should experience the product. But for this to happen, we must manage contacts with the consumer so that these contacts in fact produce an experience that matches the concept.”¹¹

Price is one of these contacts. The pricing decision is part of the brand concept, determined by the corporate strategy, and finely tuned on the product-/brand- level.

2.1 Pricing

Price is defined as “the amount of money charged for a product or service”, or more broadly, “the sum of all the values that consumers exchange for the benefits of having or using the product or service”.¹²

Pricing is the managerial process of applying prices to products or services, based on factors such as costs (of production, storage, etc.), consumers’ perceptions of value, and competition. Different pricing approaches will be further specified in chapter 2.1.2.

There seems to be agreement that, in the end, the consumer will decide whether a product’s or service’s price is “right”. Hence, when deciding on prices, a company must consider the consumer’s perceptions of price and how these perceptions might affect his or her buying decisions. From the consumer per- spective price should match the benefits of having or using the product,¹³or in other words:

Customer Value = Customer Benefits - Cost of purchase.¹⁴

As illustrated in figure 1, it are the product aspects, the brand aspects and the service aspects that together can create value for a customer, if they exceed the cost of purchase. From the customer perspective, the cost of purchase is not always equal to the price paid. It can also comprise other costs that go together with purchasing, having and using the product, such as acquisition costs, usage costs, maintenance costs, ownership costs, and disposal costs.¹⁵

For the case of the automobile industry these can be of heavy weight, looking for example at costs for insurance, fuel consumption or the resale value. As everything is a question of perspective, these cost aspects (from the customer perspective) can be seen as sources of economic value creation (from the pro- ducer’s point of view). If the producer can reduce one of those cost compo- nents, he can e.g. create higher customer value or increase the price.¹⁶

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: Customer Value¹⁷

Customer value can also be increased by improving benefits. Customer benefits can be subdivided into product benefits, brand benefits and service benefits. There are benefits that are easy to quantify (such as e.g., fuel economy, main- tenance requirements as well as sports seats, V12-engine, or other options that can be specified in an order or that can be compared to the competition), and there are benefits that are more difficult to quantify in the total cost of purchase (such as safety, reliability, design, comfort, etc.).¹⁸Besides these price and performance related economic values, also customer perceptions of service quality, brand reputation, and costs other than price affect customer value.¹⁹For the case of the car industry, a customer perceived product benefit might be the engine sound of his car, a benefit (or weakness) that cannot easily be quantified, but could, for instance, be rated in a competitive context in order to achieve some kind of objective measure. Analogously, a perceived service benefit might be the quality of advice, the surrounding in the point of sale and the friendliness of the sales personnel that might be considered differently important for the premium segment and the basic (mass market) segment.

A third source of customer benefit is a business’s brand or company reputation. ForMercedes-Benz,BMWorJaguar, the name adds social status to the product, while for other manufacturers brand associated benefits might be exclusivity (Rolls-Royce), power (Hummer), self-reward (Ferrari), or Italian driving pleasure (Maserati). All of the latter are intangible benefits that could be of great importance to many costumers.²⁰

Generally, “a business needs to be sensitive to both the benefits it creates in response to customer needs and the total cost of acquiring those benefits”²¹. Depending on the brand concept the importance and the deviation of the aforementioned determinants vary. For premium segments, brand benefits and price might play a different role than for basic segments, as will be shown in chapter 2.3. But first, in the subsequent chapter, price will be arranged into the marketing mix model in order to show its role in the context of other marketing variables.

2.1.1 Pricing as part of the marketing mix

The marketing mix consists of what is commonly referred to as the 4 P’s: prod- uct, price, promotion and placement. The decisions on these 4 P’s are generally based on a situation analysis, corporate objectives and a product- or brand- strategy. The marketing mix translates the strategic part of a marketing concept into the tactical part, i.e. on this level the tactics of how to act on the market- place are defined.

Product²²decisions relate to the product portfolio. This area deals with ques- tions like what products to sell, which new products to add or on the other hand which existing products to discontinue. Further issues concerned are product differentiation, positioning, bundling and product lining decisions and the prod- uct life cycle. Accordingly, this idea does also comply for service companies.

Promotion²³decisions deal with disseminating information about a product, product line, service, brand or a company. Promotion comprises of advertising, personal selling, sales promotion, publicity and public (as well as financial and employee) relations. A promotional mix or promotional plan is created by the specification of these variables.

Placement²⁴(also referred to as distribution) deals with logistics, i.e. how to get the product or service to the customer, but also with issues, such as the kind of distribution channel (retailer, wholesale, direct or indirect distribution, multi-level marketing channels), availability (how, where and when), inventories, the kind of relationships with channel members and the degree of cooperation in marketing activities.

And finally,pricing²⁵determines the price level for the specific product or ser- vice. The price level in general is usually already specified on the corporate level, when the company decides whether to follow a premium strategy or a mass merchandise strategy or any other strategic approach. On the marketing mix level, the marketers are then only responsible for the fine tuning of the price.

When combining the marketing mix elements and deciding on specific issues, marketers must consider their target markets. They must understand the needs and wants of their customers and then use the mix elements in constructing appropriate strategies and tactics that in turn satisfy these needs and wants.²⁶

As this paper focuses put on pricing, different pricing approaches will be explained in the following chapter.

2.1.2 Pricing approaches

“The price the company charges will be somewhere between one that is too low to produce a profit and one that is too high to produce any demand. […] Product costs set a floor to the price; consumer perceptions of the product’s value set the ceiling. The company must consider competitors’ prices and other external and internal factors to find the best price between these two extremes.”²⁷

Possible approaches to pricing are:

- Cost-based approach (cost-plus pricing, break-even analysis and target profit pricing)
- Buyer-based approach (perceived-value pricing)
- Competition-based approach (going-rate and sealed-bid pricing)

Of these, only the value-based pricing approach will be considered in this work, according to the aforementioned theory on value as the difference between benefits and costs. According to this approach, the marketer considers the price alongwith the other marketing-mix variablesbeforethe marketing program is set, instead of designing a product and marketing program and then setting the price. Thus, here the price setting is based on the customer perceptions of the offering’s value.²⁸

Since buyers in most cases will compare competitive offers, the value-based pricing approach should also consider the prices that competitors charge for similar products. Hence, to get started on pricing a firm “must learn the price and quality of competitors’ offers and use them as a starting point for its own pricing”²⁹along with the value they offer to consumers.

As mentioned before, products and services can often be easily imitated. In many cases it is the brand that for the customer finally distinguishes one product from another one or makes one product more desirable than others. The role of brands will be described in the following chapter.

2.2 Brands

Brands in the field of marketing originated in the 19th century with the advent of packaged goods. In times of industrialization the production of many household items, such as soap, moved from local communities to centralized factories. These factories, generating mass-produced goods, needed to sell their products to a wider market, to a customer base familiar only with local goods. It quickly became apparent that a generic package of soap had difficulties competing with familiar, local products. So, the packaged goods manufacturers needed to con- vince the market that the public could place just as much trust in the non-local product - the manufacturers wanted their products to appear and feel as famil- iar as the local farmers’ products. From there, with the help of advertising, manufacturers quickly learned to associate other kinds of brand values, such as youthfulness, fun or luxury, with their products. This kickstarted the practice we now know as branding.

From a today’s marketing point of view, a brand can be defined as the symbolic embodiment of all the information connected with a product or service, or as David Ogilvy put it, “the consumer’s idea of a product“. A brand typically in- cludes a name, a logo, and other visual elements such as images, fonts, color schemes, or symbols. Furthermore, it encompasses the set of expectations associated with a product or service which typically arise in the minds of people. Such people include employees of the brand owner, people involved with distri- bution, sale or supply of the product or service, and ultimately consumers.

Building a strong brand focuses on building a competitive advantage that will result in long-term profitability.³⁰The idea is based on the premise that brand building not only creates assets but is necessary for the success of the company and will pay off financially in the long run.³¹

A brand’s identity compounds of psychological and experiential aspects. The experiential aspect is known as the “brand experience” and consists of the sum of all points of contact with the brand, while the psychological aspect, also re- ferred to as the “brand image”, is a symbolic construct created within the minds of people and consists of all the information and expectations associated with a product or service. The basis for the development of a brand identity is an in- depth understanding of the firm’s customers, competitors, and business strat- egy.³²To be effective, a brand needs to resonate with customers, differentiate the brand from competitors, and represent what the organization can and will do over time.³³

In this context, the marketer aspires to develop or align the expectations com- prising the brand experience through branding, so that a brand carries the promise that a product or service has a certain quality or characteristic which make it special or unique.³⁴A brand image may be developed by attributing a “personality” to or associating an “image” with a product or service, whereby the personality or image is “branded” into the consciousness of consumers by means of the marketing mix variables. Finally, it is a holistic brand identity that marketers seek to create.

The role of brands and their function will be explained in the following chapter.

2.2.1 Role of the brand

Brands are gaining more and more in importance. Only the combination of convincing products and strong, authentic brands permits long-term differentiation from competitors. At a time when consumers are inundated with innovations, product concepts and advertising messages, strong brands supply useful orientation when making the purchasing decision.

From the consumers’ point of view, branding is an important value added as- pect of products or services, as it often serves to denote a certain attractive quality or characteristic.

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¹Ogilvy (2004), p. 22

²see Aaker / Joachimsthaler (2000), p. ix

³ see Gorchels (2000), p. 203-4; see also Kotler / Armstrong / Saunders / Wong (1996), p. 645

⁴see Baker (1990), p. 148-9; see also Kotler / Armstrong / Saunders / Wong (1996), p. 29

⁵see Aaker / Joachimsthaler (2000), p. 3-20

⁶see Schultz (2003), p. xviii

⁷see Schultz (2003), p. xix

⁸Calder / Malthouse (2003), p. 13

⁹In scientific literature and in this paper, the terms “brand concept“ and “brand identity” are used synonymously.

¹⁰ see Calder / Malthouse (2003), p. 13

¹¹see Calder / Malthouse (2003), p. 14; Gottschalk (2003), p. 20

¹²see Kotler / Armstrong / Saunders / Wong (1996), p. 621

¹³see Kotler / Armstrong / Saunders / Wong (1996), p. 630-1

¹⁴see Best (2002), p. 83

¹⁵ see Best (2002), p. 83-6

¹⁶In his book, Roger J. Best shows different ways to measure all of the aspects that impact customer value. The methods are described in chapter 4 (Customer analysis and Value Creation) of his book on “Market-Based Management”.

¹⁷adapted from Best (2002), p. 79

¹⁸see Best (2002), p. 87

¹⁹ see Best (2002), p. 90

²⁰see Best (2002), p. 92

²¹ Best (2002), p. 83

²²For more detailed information see: Kotler (2005); Gilligan / Wilson (2004)

²³For more detailed information see: Kotler (2005); Gilligan / Wilson (2004)

²⁴For more detailed information see: Kotler (2005); Gilligan / Wilson (2004)

²⁵For more detailed information see: Kotler (2005); Gilligan / Wilson (2004)

²⁶ For more detailed information see: Kotler (2005); Gilligan / Wilson (2004)

²⁷Kotler / Armstrong / Saunders / Wong (1996), p. 635

²⁸see Kotler / Armstrong / Saunders / Wong (1996), p. 643

²⁹ see Kotler / Armstrong / Saunders / Wong (1996), p. 646

³⁰An amazing example for the financial pay off of strong brands is the case ofCoca Cola. As of January 1998,Coca Colahad annual sales of $19 billions, assets of $17 billions, and profits of $4 billions, whileGeneral Motorshad annual sales of $166 billions, assets of $229 billions and profits of $7 billions. Yet in January 1998,Cokehad a market value more than four times that ofGM, in part because the value of theCokebrand equity was over twice the value of the entireGMfirm. (see Aaker / Joachimsthaler (2000), p. 15)

³¹ see Aaker / Joachimsthaler (2000), p. 14

³²see Aaker / Joachimsthaler (2000), p. 14

³³see Aaker / Joachimsthaler (2000), p. 40

³⁴ see Aaker / Joachimsthaler (2000), p. 43