Question

In many consumer goods markets, it is common for advertised brands to coexist with unadvertised brands. Advertised brands generally command higher price. Choose a real-world market where this is true, and document the price difference between advertised and unadvertised brands. Discuss whether the price difference is due to difference in quality or some other factor. How does advertising play a role in this price-quality issue?

Answer 1

Consumer goods marketers have long recognized a correlation between advertising and pricing strategies. When a product is successfully differentiated from competitive offerings, distribution in retail stores is almost ensured and premium prices can be commanded from retailers and consumers. Less well-known brands, on the other hand, struggle for distribution and consumer acceptance by positioning themselves as lower-priced alternatives of satisfactory quality; they cut factory prices and hoperetailers will pass on some of their savings to consumers.

Examples of this phenomenon abound. Heinz ketchup usually sells at wholesale prices that are about 10% higher than Hunt’s or Del Monte’s and as much as 20% over private labels’. In the supermarket, the spread between Heinz’s prices and its competitors’ is somewhat less.

premium prices and high advertising expenditures can march hand in hand, this is not the only successful marketplace strategy, nor is such a strategy a guarantee of success. What is important to keep in mind is that consistency between the two is crucial for short-term and medium-term profitability. In most markets, consistency means that relative prices and relative advertising levels are coordinated. In other words, high relative advertising expenditures should accompany premium prices, and low relative advertising expenditures should be tailored to low prices.

Unfortunately, no hard quantitative evidence concerning the prevalence of the relationship between premium price and high advertising expenditures has previously been gathered. Nor has the degree to which premium prices stem from advertising as opposed to other differences among products such as product quality been ascertained.

that brands with high relative advertising budgets are also charging premium prices, and vice versa

Effect of Product Quality

Marketers often argue that their products command higher prices not merely because they are advertised but also because they are of high quality. This is undoubtedly true in many cases but may or may not have an effect on the relationship between relative advertising and relative price. Even if one accepts the proposition that Anacin dissolves faster than private-label aspirin, the price differential between the two would probably not be as great as it is without advertising.

businesses with high-quality products charge high relative prices for the extra quality but that businesses with high quality and high advertising levels obtain the highest prices. Conversely, businesses with low quality and low advertising charge the lowest prices. Businesses that consider their products of higher quality and that advertise at levels higher than competition charge prices that average 6.5% above competitors’. For high-quality producers with less relative advertising, this figure is –.1%. Thus quality alone does not enable the business to command the same price as quality that is communicated to consumers.