Three things you should know about brands and pricing

Price changes have been unavoidable in recent years.

From the 2022 cost of living crisis to rising energy costs and now global tariffs, many businesses have had little choice but to raise prices. But raising prices always feels risky. We often hear “Is it the right thing to do?”, “How many sales will we lose?”, “What will the P&L look like?”.

Magic Numbers and Analytic Partners have a proven track record of helping brands demonstrate the value of marketing and unlock pricing power. As further price shifts loom, here are three things every brand should know about pricing, and the role advertising plays in shaping it.

Your price is relative to competitors

Your price is, in many cases, only really relevant in terms of your competitors’ prices. In necessity categories especially, sales performance depends less on your absolute price and more on how your price compares to your main rivals.

If you sell a necessity, people have to buy something form your category

What matters is your price relative to competitors' prices, as well as your investment in advertising

One magic numbers CPG client saw this first hand. After raising prices, sales dipped. But five weeks later, competitors followed suit. Once the price gap closed, most of the “lost” sales returned. The lesson: price increases sting less when the market moves with you.

Advertising reduces price sensitivity

There’s an important number we often use when we talk about pricing, your price elasticity. It’s the percentage that your sales go down for a 1% increase in your price. So, if your sales go down 2% when your price goes up by 1%, you have a price elasticity of -2%. The closer your elasticity is to zero, the less you lose when prices go up.

The question is, what helps brands achieve lower price elasticity? Consistent advertising.

Businesses that spend more on advertising get the good outcome

When they put prices up, the drop in sales is smaller

We looked at a large database of econometrics studies in FMCG, and it showed that brands investing more heavily in marketing on average lost fewer sales as a result of price hikes. It doesn’t happen overnight – but sustained investment builds resilience.

Advertising builds long-term pricing power

In fact, improving the power of your price can happen within three years.

Here lies proof that your price elasticity isn’t set in stone. And it’s not only tied to your products, or the competitors in your category – the amount of sales you lose from putting your price up can be reduced over three years by investing well in good ad campaigns.

Spending on advertising reduces your sensitivity to price rises, while being outspent makes you more vulnerable

Changing price sensitivity for 3 sister brands with different excess share of voice

In the chart above, you can see a breakdown of the study that proves this. In this econometrics study from some of our friends at adam&eveDDB, a business shifted around the budgets of its three sister brands over a three-year period.

With the grey dot, you can see the starting point in year 1. Here, Brand A was losing only 1.3% of sales from a 1% increase in price – that’s pretty good – with Brand C not doing nearly as well at 2.4% lost for a 1% price increase. But the brand decided to shift budget towards Brand C, such that it was spending with a share of voice 9.3% higher than its market share (a 9.3% Excess Share of Voice).

Meanwhile, Brand A was left to rest on its laurels, actually spending at 2% less SOV than its market share. The outcome was that Brand C saw a huge improvement in its price elasticity, making it far less price sensitive, while Brand A’s price elasticity got worse as it under-invested.

For context, in year 1, Brand C would have lost 24% of sales for a 10% increase in price. But by year 3 of a share of voice way larger than its market share, the same 10% increase in price would lose it only 7% of sales.

That’s going to be a way, way, way better P&L!

Making the change now could make the future a little more comfortable

Price is one of the most powerful levers in your marketing toolkit. And that lever can be stiffer or looser depending on category dynamics, competitor moves, and how much you invest in building brand strength through advertising.

A strategy where price increases don't make a business less profitable, but instead protect the P&L is what your business leader wants.

The opinions expressed here are those of the authors and were submitted in accordance with the IPA terms and conditions regarding the uploading and contribution of content to the IPA newsletters, IPA website, or other IPA media, and should not be interpreted as representing the opinion of the IPA.