Impact of Product Differentiation, Marketing Investments and Brand Equity on Pricing Strategies

European Journal of Marketing
Impact of product differentiation, marketing investments and brand equity on
pricing strategies: A brand level investigation
Nebojsa S. Davcik Piyush Sharma
Article information:
To cite this document:
Nebojsa S. Davcik Piyush Sharma , (2015),"Impact of product differentiation, marketing investments
and brand equity on pricing strategies", European Journal of Marketing, Vol. 49 Iss 5/6 pp. 760 - 781
Permanent link to this document:
http://dx.doi.org/10.1108/EJM-03-2014-0150
Downloaded on: 19 June 2015, At: 11:47 (PT)
References: this document contains references to 68 other documents.
To copy this document: [e-mail]
The fulltext of this document has been downloaded 297 times since 2015*
Users who downloaded this article also downloaded:
Aihwa Chang, Timmy H. Tseng, (2015),"Consumer evaluation in new products: the perspective
of situational strength", European Journal of Marketing, Vol. 49 Iss 5/6 pp. 806-826 http://
dx.doi.org/10.1108/EJM-06-2012-0374
Janine Empen, Jens-Peter Loy, Christoph Weiss, (2015),"Price promotions and brand loyalty:
Empirical evidence for the German ready-to-eat cereal market", European Journal of Marketing, Vol.
49 Iss 5/6 pp. 736-759 http://dx.doi.org/10.1108/EJM-08-2013-0433
Renaud Lunardo, Dominique Roux, (2015),"In-store arousal and consumers’ inferences of
manipulative intent in the store environment", European Journal of Marketing, Vol. 49 Iss 5/6 pp.
646-667 http://dx.doi.org/10.1108/EJM-10-2013-0560
Access to this document was granted through an Emerald subscription provided by emerald-
srm:263496 []
For Authors
If you would like to write for this, or any other Emerald publication, then please use our Emerald
for Authors service information about how to choose which publication to write for and submission
guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information.
About Emerald www.emeraldinsight.com
Emerald is a global publisher linking research and practice to the benefit of society. The company
manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as
well as providing an extensive range of online products and additional customer resources and
services.
Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the
Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for
digital archive preservation.Downloaded by University of Mississippi At 11:47 19 June 2015 (PT)

*Related content and download information correct at time of
download.Downloaded by University of Mississippi At 11:47 19 June 2015 (PT)

Impact of product differentiation,
marketing investments and brand
equity on pricing strategies
A brand level investigation
Nebojsa S. Davcik
ISCTE Business School, University Institute of Lisbon (ISCTE-IUL),
Lisbon, Portugal, and
Piyush Sharma
Professor, School of Marketing, Curtin Business School, Curtin University,
Bentley, Australia
Abstract
Purpose – This paper aims to show the effect of brand equity, marketing investment and product
differentiation on price in small and medium enterprises (SMEs), multinational companies (MNCs) and
retailers (private labels). Academics have been researching brand equity, return on investment and
effects of product differentiation for many years, but there has been little work that has taken a holistic
view.
Design/methodology/approach – The author studied an aggregate data set for 735 fast-moving
consumer goods (FMCG) brands, taken from Nielsen (10,282 households). Regression analysis was used
in the first step, a cluster analysis in the second step of modeling procedure.
Findings – The study suggests that brand equity, marketing investment and product differentiation
are closely associated with price. Using a cluster analysis, the authors found that the premium price is
significantly associated with product differentiation based on innovation and company type.
Practical implications – The managerial implications of the models estimated by regression
analysis are discussed as well as the results of the cluster analysis and possible research enhancements.
Originality/value – The role of the value in brand performance output has not been investigated in
the financial context, only in consumer or marketing mix context. Little is known about how price
strategy depends on brand equity, product innovation activities or marketing investments intended to
improve brand performance, neither how this strategy improves brand performance among different
players in the market (retailers, SMEs and MNCs).
Keywords Branding, Food products
Paper type Research paper
Comments and suggestions from Colin Jevons, Richard Priem and Jonathan Bohlmann on an early
version of this manuscript are greatly appreciated. The authors thank to participants of the World
Marketing Congress 2013 (Melbourne) and 8th Global Brand Conference (Porto) for their valuable
insights. Some parts of the early stages of this study were developed during the first author
doctorate program at the University of Padua (Padova, Italy). The authors are grateful to the
Business Research Unit (BRU) of the University Institute of Lisbon (ISCTE-IUL) for their support
in the editing process.
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/0309-0566.htm
EJM
49,5/6
760
Received 8 March 2014
Revised 30 June 2014
7 October 2014
Accepted 7 December 2014
European Journal of Marketing
Vol. 49 No. 5/6, 2015
pp. 760-781
© Emerald Group Publishing Limited
0309-0566
DOI 10.1108/EJM-03-2014-0150Downloaded by University of Mississippi At 11:47 19 June 2015 (PT)

1. Introduction
Most companies use marketing-performance measures such as brand loyalty, market
share, price premium and customer lifetime value to determine their success or failure.
Pricing is one of the most important elements of marketing mix, and pricing strategies
play an important role in a company’s marketing strategy (Kotler and Keller, 2012;
Tirole, 1988). Hence, it is not surprising to see a large body of research on pricing in both
marketing and finance areas on pricing; however, the application of this type of research
to both theory and practice has not been as prevalent as other marketing variables
(Duke, 1994; Christopher, 2000).
One of the main reasons for this gap between theory and practice could be the
difference in the orientations of marketing and finance researchers, with researchers in
finance focusing on the impact of firm strategies and stakeholders’ short-/long-term
expectations and marketing researchers on customer reactions and/or impact of
branding on marketing strategies and decisions (Madden et al., 2006). A second reason
could be that finance researchers typically use firm-level data from equity markets and
the company’s financial statements, while marketing researchers generally use surveys
or an experimental-research approach (Madden et al., 2006).
As a result, it is not usual for marketing researchers to deal with huge databases that
can explain company, consumer or product (brand) patterns and behavior, nor is it usual
for them to conceptualize their research using the findings from either industrial
organizations (or any approach from a broad microeconomic theory) or other fields of
economic science (such as finance, etc.). As scholars have studied neither pricing
controversy (Myers et al., 2002) nor its antecedents in detail (Christopher, 2000), the
pricing strategy is very often based on intuition and the working experience of
managers rather than on empirical findings. We address this lack of empirical research
on pricing using real-life data.
Many companies try to improve their marketing strategy through brand
differentiation, using innovations in the technology or marketing domain. However, the
question remains as to how do differentiations in pricing and branding relate with each
other for different types of players in the market, such as small and medium enterprises
(SMEs), multinational companies (MNCs) and retailer (private label) brands. In fact,
there is hardly any empirical research on how and whether brand differentiation and
investments in brand building affect consumers’ willingness to pay a higher price, or to
what extent these effects vary across different contexts. This is the second gap we
address in this research.
In the words of Hanssens et al. (2009, p. 116), although the key marketing and
financial metrics are influential factors in market valuation and, consequently, a firm’s
market value“, how all these marketing assets, capabilities and actions play out in
determining market value remains somewhat of a mystery. These issues are important
because managers make decisions about these factors every day and the intention of our
study is to give them more information to support this decision-making process. The
literature on the interaction among brands, price and differentiation is scant. There is no
clear answer as to how drivers of brand equity influence a company’s competitive
strategy in a brand performance context (Chu and Keh, 2006; Peterson and Jeong, 2010).
We address this lack of evidence about the link between the drivers of brand equity and
marketing performance.
761
Brand level
investigationDownloaded by University of Mississippi At 11:47 19 June 2015 (PT)

To summarize, the aim of this study is twofold: first, to analyze the effects of brand
equity, marketing investments and product differentiation on price; and second, to
study the price in three different innovation types (conventional, organic and functional)
and for three different market players (SMEs, MNCs and retailers). The food brands are
clearly differentiated by the technology, quality and production standards applied; and
conventional food has the lowest innovativeness applied, whereas functional food has
the highest (Verbeke, 2006; Sparke and Menrad, 2009; Hamzaoui-Essoussi and Zahaf,
2012; Davcik, 2013). In this process, this paper makes several contributions to the
existing business literature. First, we estimate a model that empirically tests pricing,
brand equity, marketing investments in the brand and several innovation variables. The
literature (Duke, 1994; Christopher, 2000) has reported the need for empirically based
and overall solutions regarding relationships among brand price, brand equity and
innovation. Second, we study the impact of product (brand) differentiation on price,
based on innovation.
Our approach is in line with recent calls to study factors that determine the effects of
marketing assets on financial metrics (Hanssens et al., 2009; Bharadwaj et al., 2011;
Madden et al., 2006). Third, existing marketing and branding studies in the SME context
(Keller, 1993; Peterson and Jeong, 2010; Sriram et al., 2007; Park and Srinivasan, 1994;
Simon and Sullivan, 1993) mostly use a single-method (e.g. customer surveys, panel
data, financial-report data), use a single unit of analysis (consumer, financial,
organizational, etc.) and focus on one type of organization (MNC or public companies).
In this study, we combine several research measures and methods to provide richer
and deeper insights:
• a consumer approach, using data from real-life consumers;
• a financial approach, employing financial data from the companies whose brands
are part of the study; and
• a marketing approach, using a brand data set that forms the basis for the
qualitative data employed in the study.
Our methodology is based on a two-stage approach. In the first stage, we use a
regression analysis to estimate how price performs in “Fast Moving Consumer Goods”
(FMCG) context. After studying the role of price, we test its performance using a cluster
analysis so as to determine how the product differentiation, driven by innovation, can
lead to a premium price, as well as which player in the market (SME, MNC or retailers)
may obtain this price. This is in line with Ketchen and Shook’s (1996) suggestion of not
using cluster analysis in isolation but to augment it with additional statistical
techniques, such as multivariate analysis.
This paper is structured as follows. We begin with a review of relevant pricing and
branding literature to develop our framework and hypotheses. Next, we present the
two-stage model with detailed descriptions of the data set and the variables as well as
estimation of the pricing model using regression analysis and analysis of product
(brand) differentiation using cluster analysis. The final section describes and interprets
the results of the study and concludes with implications for managers.
2. Conceptual background and research model
Companies usually compete in oligopolistic and open markets with similar technologies
and marketing know-how. This implies creating competition on pricing is a dominant
EJM
49,5/6
762Downloaded by University of Mississippi At 11:47 19 June 2015 (PT)

business strategy and this will lower profits in the long term. To defend its current
position (i.e. price level and market share), an incumbent company has more incentives
to introduce new brands than an entrant because of the “efficiency effect” that tends to
bias market structure toward multi-brand situations (Tirole, 1988). The other side of the
coin is that an entrant has an incentive to proliferate and differentiate its brands to gain
new market power and a better position in the market (Schmalensee, 1982; Sriram et al.,
2007). However, there are no clear guidelines on how to create an appropriate and
efficient pricing strategy.
The theory of industrial organization (IO) suggests that consumers will be ready to
pay a premium price if alternative brands do not have the same quality as the preferred
brand, wherein the brands are differentiated and the cross-elasticity of demand is
limited to equal prices (Tirole, 1988). The principle of differentiation also explains why
companies generally do not want to position their brands in the same market place as
competing brands (Tirole, 1988). The reason for this behavior is explained by the
Bertrand paradox because perfect and competing brand substitutes will face strong
price competition which will jeopardize the prospects for profit and growth in the
market. In IO terminology, product differentiation will create market niches and new
markets, allowing entrants (first-time movers into the new market) and/or incumbents
(dominant innovators in the existing market) to enjoy some market power over
competing brands for a period of time.
Contemporary pricing theory is based on rational, classical economic behavior that
views price as a signal of quality (Erdem et al., 2010; Ngobo, 2011). This economic
mechanism suggests that higher prices correspond to higher quality, which implies that
a premium price might be achieved only by premium quality and differentiation based
on innovation (Schmalensee, 1982; Erdem et al., 2010; Kamakura and Russell, 1993). The
premium price represents consumers’ willingness to pay more than the usual or
generally expected price. In a marketing context, this definition can be expanded and
understood as consumers’ willingness to pay extra for the additional value that the
brand offers. This mechanism takes place when a consumer is ready to pay for a product
because he/she also wants to acquire certain benefits from a brand. Hence, a firm should
set the price around the values that the brand offers to consumers.
The role of value in brand-level performance has rarely been investigated (Barth
et al., 1998; Peterson and Jeong, 2010), and little is known about how price depends on
brand equity, innovation activities or marketing investments intended to improve brand
performance. Pricing has a multi-decision consequence on a company’s performance. In
a multi-brand organization, the price decision made about one brand will influence the
performance of another. This is because of the internal competition and possible
cannibalistic situations that can occur among brands within the multi-brand company.
Firms must clearly differentiate their brands according to value cues and innovation, as
well as different price categories and strategies among internally competing brands.
The situation is similar in the marketplace, where competing brands are interconnected
like water tanks; in general, if one organization lowers/raises prices, or introduces new
enhancements or advertising campaigns, it will affect competing brands and change the
existing market equilibrium.
In the context of this research, we understand that a premium price is a higher price
than the average for a product category (i.e. cluster of products) in comparison to several
other and similar categories across the same industry segment and market. The
763
Brand level
investigationDownloaded by University of Mississippi At 11:47 19 June 2015 (PT)