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On Pricing and Promises
Two weeks ago I was listening to some old episodes of Planet Money and ran across this story exploring why US veterans hold a grudge against the Red Cross. Turns out the harsh feelings go all the way back to a decision the Red Cross made during World War II to move from giving away free doughnuts to charging military personnel. While the Red Cross had a pretty good reason for the price shift (it was a request from allied partners whose own personnel weren’t afforded the luxury of pastries without a price), 70 years later the veterans still haven’t forgiven the organization.
As small as this pricing change might seem, it became a big deal for military personnel and something the Red Cross is still trying to overcome 70 years later. The issue boiled down to two core challenges:
1) Reference pricing:
The first challenge was the price change (from zero dollars to NOT zero dollars). Once you set a baseline, or reference cost, in someone’s head it’s massively hard to make them think that thing is worth more than that. This is only made more difficult when that baseline is free. Take airlines, for example. It used to be free to check a bag. When they changed those policies seemingly en masse, everyone naturally became upset—even though it is logical that you would pay additional for shipping a package. You have no problem paying UPS or FedEx to fly your goods from one place to another. The problem, as was the case with the doughnuts, is that once that reference price is set it’s difficult to change.
2) Categorical change, or breaking a brand promise:
If reference price is hard to change, this one is near impossible. This wasn’t just about the price of doughnuts, it was about the perceived promises the Red Cross made as an organization. The Red Cross positioned itself as family, so asking people to pay for doughnuts was like your cousins charging you when you came over for Sunday dinner. This fundamentally changed the nature of the relationship that the service members thought they had with the Red Cross.
While number one is rough, number two is brand betrayal.
Most brands don’t give things away for free, but they do frequently discount, and this story reminded me of a research report I read recently titled, ‘Advertising Effectiveness: the long and short of it’. With this report, Les Binet and Peter Feld examined the difference between short and long-term advertising in terms of effectiveness and efficiency, and looked into the psychology of both forms of marketing. The research went through what made them similar, how they were different, and why advertising doesn’t work like you might think. The gist: A bunch of incremental short-term gains (often from discounting) don’t add up to long-term results.
The research is filled with great takeaways, but two areas connect closely to the Red Cross doughnuts example: Short-term pricing and how emotions work in marketing.
Short-term activity can damage long-term brand health
With the rise of digital, there is no question that marketers are more focused than ever before on short-term metrics. The data shows that marketers, especially those in the C-Suite, feel more pressure to demonstrate value than ever before:
Oftentimes, when the pressure is on, the goal is to show as much short-term success as possible, or that the most value was delivered in the shortest time span. What the study showed is short-term activations typically have a price element which can be harmful to brand-building because it increases consumer price sensitivity. Reducing price sensitivity is a key long-term goal as it protects brands from economic and market fluctuations.
The challenge is that marketers need to balance the pressures of short-term volume growth with continuous improvement of price over the long-term. Strategies that maximize short-term sales can undermine long-term profit objectives, and those that maximize long-term profit can underachieve short-term sales goals.
While this is not your typical case of activations or price reductions, the Red Cross is illustrative of how a short-term price change had a major impact on the organization’s long-term brand health.
It is also quite clear that in order for marketers to deliver value and build amazing brands, one of the most important metrics is time:
Emotional > Rational
The Long and Short of It challenges the assumption that purchase decisions are largely rational, arguing that emotional variables such as brand preference, engagement, and affinity are far more powerful drivers of buying behavior than functional considerations such as price. According to the research, the majority of decision-making happens at a subconscious level, and is emotion-based rather than rational.
These two charts from the IPA help showcase how emotional messaging can help create a premium for your brand over short-term rational messaging, which often revolves around price discounts.
The Cost and Promise of Free
To go back to the Planet Money podcast, the Red Cross built at least part of their brand categorically as being similar to a family. Something that didn’t work when WWII became a federation of nations and the USA couldn’t make decisions unilaterally.
From the IPA research, it is clear how sensitive people are to pricing and how damaging price can be if you don’t build emotional connections with customers that go beyond price, or, as with the Red Cross, you build emotional connections you can’t support for the long-term.
Keeping your promises, however small, matters whether you are managing a team of five, a brand like Coca-Cola that touches over 1 billion people per day, or a multinational aid organization like the Red Cross.
A major role of marketing, if it was to be simplified, is to help your company become more valuable over time. On a tactical level that value comes through growing market share, raising your prices, or both.
But on a more strategic level, marketing owns the brand — the sum of all its communications — and is responsible for delivering on the promises that brand makes over the short and long-term.