Ever since McDonald's started serving up 59¢ hamburgers and supermarkets launched private-label lines, value has come to mean one thing -- cheap. But a new realization is sinking in among marketers: It can't stay that way if brands are going to survive the dodgiest economic-recovery narrative this side of Lindsay Lohan.
America's top marketers, from Procter & Gamble to McDonald's and Ford Motor Co., are trying -- with varying degrees of success -- to shift consumers' perception of value from a product that's bargain-priced to one that's convenient, efficacious or high-quality enough to command a premium price.
Brands can no longer bide their time, fending off store-brand options while waiting and hoping for consumers' wallets to fatten. About 40% of the U.S. population is still downtrodden, concerned or otherwise worried about their financial futures, according to IRI research.
In addition to convincing consumers, brands may need to perform an even tougher trick: redefining their own definition of value to one that's additive. When not reduced to the question of price, value speaks directly to what benefits a product or service adds to a customer's life. Some smart brands get this and are using packaging, design, sourcing strategies and technologies to entice consumers to get them to open their wallet a bit more, even in these tough times.
"Marketers have clearly contributed to how consumers perceive value," said Kevin Keller, professor of marketing at Dartmouth College's Tuck School of Business. He noted that as consumers fall back on price equaling value, marketers may need to reframe the conversation to center on cost benefits.
What's sure to be the classic example of a recessionary innovation that gets consumers to pay more, not less, is P&G's Tide Pods. The repackaging of its detergent into one-pack-per-load pellets is a clear boon to the consumer because it eliminates messy measuring. For P&G, it's been a breakout hit that rocketed to $500 million in U.S. sales in only about a year, according IRI figures. The bundle of individual laundry detergent packages comes at a significant premium to liquid Tide -- $18.99 for a 66-load container of Pods on Walgreens.com.
Moreover, Tide Pods is consistent with the Tide brand's overall premium positioning. Consider a recent commercial for Tide, a brand that retails about 35% higher on Walmart.com than cheaper offerings such as Arm & Hammer. The spot, from Saatchi & Saatchi, shows parents of triplets folding laundry. Says the mom: "We switched to the bargain brand. But I found myself using three times more than you're supposed to and still the clothes weren't as clean." Her husband adds, "So we're back to Tide." The voice-over then says, "Just one dose of Tide Original Liquid helps remove food stains better than an entire 40-load bottle of the leading liquid bargain brand."
You're probably thinking that that's all well and good for ad copy, but in reality recessionary consumers are too price-sensitive for this sort of marketing approach. You'd be right -- and wrong.
An article in the February issue of the Journal of Marketing Research looked at 24 quarters of pricing data for 19 grocery categories and found that on average, price sensitivity is countercyclical to the economy, which is to say that it increases as the GDP declines. No surprise there. What is interesting is that countercyclicality isn't true across grocery categories. The degree of sensitivity, the authors found, varies significantly and depends on whether you're talking about peanut butter, spaghetti sauce or toilet tissue.
What explains this variance? The researchers conclude that share of wallet is one of the likely determining factors. "Prices should fall primarily in those categories that are an important component of consumer budgets," they wrote. "In contrast, in other categories, raising prices may even be optimal."
While providing some research-based air cover for price increases, the authors don't delve into how brands might ask for more while not losing consumers. Tide, with its Pods product, has done it through convenience and packaging acumen.
Then there's quality. Greek yogurt is on average about 40¢ more than standard yogurt, yet it's the only growth driver in the category, according to Nielsen. Despite the higher cost, consumers flocked to it because they appreciated the texture and higher levels of protein. In this case, "value didn't mean cheap, consumers felt it made their lives better," said Larry Levin, exec VP-consumer insights at IRI.
Mr. Levin said that for these consumers, "perceptual luxury" is key. Products like Keurig's K-Cups aren't as cheap as a pound of coffee, but they're not as expensive as a cup of coffee at Starbucks. Consumers see them as a trade-up and a convenience, but still a better deal than coffee from a coffeehouse. "It's not about something being cheap -- it's about better experiences at home," said Mr. Levin.
Ford Motor Co. is taking a different tack: technology. In 2011, Ford found that adding Sync, its hands-free communications system that lets drivers control music, make calls and perform other voice-enabled activities, was contributing to average price-per-transaction increases of more than $4,000. Ford has said more recently that over 50% of customers cite the tech system as a reason for purchase. The lesson: in tough times, consumers are willing to pay for added value.
In no category is the word "value" more bandied about than in fast food, in which more often than not it's become synonymous with rock-bottom prices. A survey of McDonald's franchisees by Janney analyst Mark Kalinowski in advance of the company's first-quarter earnings last week (global same-store sales fell 1%) found several riled by the company pushing discounting, which is eating away profits for franchisees. Specifically, some were frustrated that the chain urged them to introduce McWrap -- intended to be premium priced -- for $1. The problem is that it costs $1.70 just for ingredients, a person familiar with the company told Ad Age. (McDonald's said the figure is proprietary and declined to comment further.)
"It's one or the other, the Dollar Menu or other discounting. We can't continue to do both," said a franchisee in the survey. "Every marketing plan focuses on discounting and giveaways," commented another.
Contrast that with the approach Wendy's is taking with its Right Price, Right Size menu. "Everyone has a value menu these days. But at Wendy's, value is more than a low price," reads a recent Wendy's magazine ad. "That's why our Right Price, Right Size lineup is loaded with over a dozen choices all made with the same quality ingredients as the rest of our menu. Because we want you to like what you spend and love what you eat."
Wendy's new menu marketing promotes low prices that range from 99¢ to $1.99.
"The fact that you have choice is a greater value than just price," said Wendy's spokesman Denny Lynch.