When a powerful brand is not enough

The top management of a leading company in the construction supplies sector in Colombia was stunned. Despite having the brand with the highest brand equity in the market, it had been systematically losing market share in recent years. What could explain that even with a brand whose value far exceeded that of its competitors, it still lost market share year after year? How was this possible if they had evidence showing that the brand was the most important attribute in the category, accounting for 35% of the purchase decision? The explanation lies in the relationship between perceived value, price sensitivity, and purchase intention.

The difference between perceived value and price sensitivity
To understand the relationship and difference between these three concepts, let’s look at an example. Almost everyone would agree that a BMW is better than a Chevrolet. Moreover, if you asked one hundred people which car they would prefer to own, the vast majority would likely choose the BMW. But then, why does Chevrolet sell more cars than BMW in the region? The fact that most people prefer BMW over Chevrolet reflects the higher perceived value of the first brand. However, not everyone has the money needed to buy a BMW. There are people who, despite recognizing and valuing the superiority of that brand, are so price-sensitive that they have no choice but to settle for a more affordable option, such as a Chevrolet. And the final purchase decision is determined by a combination of the buyer’s perceived value and their level of price sensitivity. As a result, although most people would like to own a BMW, not everyone can afford it.

Returning to the case of the construction supplies company, although most people would like to buy the traditional high-value brand, not everyone is able to pay the price premium justified by its brand positioning. As a result, customers who are more price-sensitive and do not have enough money to buy the traditional brand choose the cheaper brand of a competitor, and the leading company continues to lose market share.

Using flanking brands
How can this problem be solved? By recognizing that there will always be a group of highly price-sensitive customers willing to give up some perceived value in exchange for a better price, the use of flanking brands becomes relevant. In this case, the company should use the lower-value brands it fortunately already owns to serve that large group of highly price-sensitive customers. This way, every customer who cannot afford the traditional brand will find an option within the company’s portfolio that fits their budget, instead of buying from a competitor.

But most companies resist accepting that their “lifelong” brands, which still enjoy high levels of brand value, are losing market share year after year. And to stop this “bleeding” of volume, they resort to misguided actions such as lowering the prices of those products. The right approach is to recognize that high-value brands should contribute margin to the company, while lower-value brands should generate high volumes. That is why it should not be surprising that, as the market matures and customers become increasingly price-sensitive, the volume of the traditionally leading brands may even be lower than that of the flanking brands.

In summary...
A high-value, well-positioned brand is not enough to guarantee similar levels of purchase intention and market share. It is necessary to estimate the proportion of customers in the market who are willing and able to pay the price premium associated with that brand value. When most of the market is highly price-sensitive and many alternatives exist, it is normal for those buyers to choose the cheapest competing products. To maximize value capture in such a market, more affordable offers should be provided under lower-value brands — and one should never, ever fall into the temptation of lowering the prices of the high-value brand.