Brand Equity, Pricing Power and Price Elasticity

Introduction

A brand's pricing power is measured by the volume it loses when it raises prices. In the fourth quarter of 2025, Hershey's North America Confectionery segment took roughly 10 points of net price realization to offset much higher cocoa costs, and the company reported that volume decreased approximately 5 points, reflecting price elasticity. Sales still grew, because the price gain was larger than the volume loss. A weaker brand facing the same cost shock would have lost more volume, or would not have dared to raise prices at all.

That trade between price and volume sits at the center of consumer products economics. It decides how a brand owner protects its margins when costs rise, how much growth comes from price rather than from more buyers, and what an acquirer is really paying for when it buys a brand. The source of the advantage is brand equity: the accumulated preference that makes shoppers choose, and pay more for, one product over a near-identical alternative. The sections below cover where brand equity comes from, how price elasticity works, what advertising, innovation and scale buy, and how bankers test a brand's pricing power.

Two bottles of ketchup can contain nearly identical ingredients and sit side by side on the same shelf, yet one sells for a large price premium and outsells the other many times over. The difference is not in the product. It is in the shopper's mind and in the store, and it is what consumer bankers mean when they talk about a brand's franchise value.

Brand Equity

The commercial value a brand adds to a product beyond its functional features, reflected in shoppers' willingness to choose it over alternatives and to pay a premium for it. Brand equity is built through awareness, perceived quality, habit and availability, and it shows up in pricing, repeat purchase rates and resistance to store brands.

The sources of brand equity

Brand equity rests on a few reinforcing sources:

These sources compound. A well-known brand earns more shelf space, which makes it more visible, which reinforces awareness. That flywheel is why category leaders often hold share for decades, and why insurgent brands that break it are so valuable to acquirers.

Brand equity differs by category

The strength of brand equity varies widely across categories. Where products are hard to tell apart and quality is easy to judge, such as milk, sugar, flour or paper towels, store brands take large shares and national brands earn small premiums. Where quality is hard to judge, the risk of a bad choice is high or the product carries emotional meaning, brands earn far more: baby formula, over-the-counter medicines, cosmetics, spirits and luxury goods all support large premiums. Bankers use this pattern to judge how defensible a brand's position is before they look at any financials.

How brand equity shows up in the numbers

Bankers cannot measure brand equity directly, but they can see its effects:

Gross margin is the summary statistic most people reach for, because a brand's premium over its production cost shows up there first. The blog's guide to EBITDA margins by sector shows how consumer margins compare across industries. Brand equity also appears on the balance sheet when a brand is acquired, and the methods used to put a number on it are covered in the article on valuing a consumer brand.

Pricing power is easy to claim and hard to prove. The concept economists use to measure it is price elasticity of demand, and it is the number behind every debate about whether a brand can keep taking price and how much of a company's price realization will stick.

Price Elasticity of Demand

The percentage change in the quantity of a product sold divided by the percentage change in its price. An elasticity of -0.5 means a 10% price increase reduces volume by about 5%. Products with low (inelastic) elasticity have more pricing power; products with high (elastic) elasticity lose volume quickly when prices rise.

In formula form:

Most established food, beverage and household brands have elasticities well below 1 in absolute terms over the short run, meaning that a price increase raises revenue even though some volume is lost. The question is how much volume, for how long, and where the lost buyers go.

The price-volume trade-off

The arithmetic of a price increase depends on both elasticity and unit margins, and it is more favorable than the volume decline suggests, because every unit still sold carries the full price increase as extra gross profit.

Hershey's 2025 results show the trade-off at the scale of a whole segment. For the full year, North America Confectionery grew through about 6 points of price and lost about 2 points of volume and mix. In the fourth quarter, when price increases were larger, the volume loss was larger too, about 5 points against about 10 points of price. The implied elasticity was modest, but it rose as the increases grew.

Short-run and long-run elasticity

Elasticity measured in the first quarter after a price increase usually understates the eventual effect. Shoppers do not all react at once: some keep buying out of habit, some switch the next time they see a promotion on a rival, and some drift to store brands over months. Long-run elasticity is therefore higher than short-run elasticity, and a brand that looks unaffected by an increase can lose share steadily over the following year.

The destination of lost volume matters too. Economists distinguish switching to a competitor, measured by cross-price elasticity, from leaving the category altogether. A shopper who moves from a national brand to the store brand is still buying the category, and the retailer is content; a shopper who stops buying snacks is lost to everyone. Brands watch both, because switching within the category can be won back with promotions, while leaving the category usually cannot.

When elasticity rises

Elasticity is not fixed. It rises when:

PepsiCo learned this after several years of increases. In early 2026 it said it would cut prices on Lay's, Doritos, Cheetos and Tostitos, with its chief executive telling investors that affordability was the biggest friction for low- and middle-income consumers in the category, after snack volumes had fallen. Tests of lower prices in some markets had already lifted sales. The competition with store brands that pushes elasticity up is covered in the article on private label versus national brands.

Pricing through an inflation cycle

The years after 2021 showed the full inflation cycle. As ingredient, packaging, freight and labor costs rose, brand owners took repeated price increases and enjoyed a period of cost pass-through with little resistance, and volumes held up better than many expected because shoppers faced higher prices everywhere. Margins recovered once prices caught up with costs. Then, as inflation eased and household budgets tightened, shoppers became more selective, volumes weakened and several large brand owners had to invest in lower prices or promotions to win buyers back. How costs move and how quickly prices follow is covered in the article on input cost inflation and pass-through.

Brand owners rarely change list prices alone. The price a shopper pays, and the net price the brand owner actually receives, depend on pack sizes and promotions as much as on the list price.

Price Pack Architecture

The deliberate design of a brand's range of pack sizes, formats and price points so that each shopper group and channel finds an option at the right price. It lets a brand owner raise the price per unit of product, offer entry price points for squeezed shoppers and protect margins without changing the headline price of its core pack.

A smaller pack at the same shelf price raises the price per ounce without the visible jump of a list price increase, a practice shoppers call shrinkflation when it is not accompanied by any other change. A small pack at a low entry price keeps lower-income shoppers in the brand. Promotions move the effective price up and down without changing the list price, and much of a brand's realized pricing comes from reducing the depth or frequency of discounts rather than raising list prices. The cost and mechanics of promotional spending are covered in the article on trade spend and gross-to-net.

Brand equity has to be maintained. Three kinds of brand investment keep a brand strong: advertising, innovation and the scale that pays for both.

Advertising

Advertising keeps a brand salient. Shoppers forget brands they stop seeing, and the shelf is crowded with alternatives, so large brand owners spend heavily every year to stay in mind. The Coca-Cola Company, for example, reported advertising costs of $5.4 billion in its 2025 annual report, up from $5.1 billion in 2024. Brand owners often track this spending together with consumer promotions as advertising and promotion, measured as a share of sales.

The mix of advertising has changed. Brand advertising on television and in other mass media builds awareness over years, while performance marketing on search, social media and retailers' own websites aims at an immediate sale. Retail media, the advertising retailers sell on their websites and apps, has grown quickly because it reaches shoppers at the point of purchase, but much of it substitutes for promotional spending the brand already gave retailers. Advertising is also one of the easiest costs to cut, which creates a risk for anyone analyzing a consumer company's margins.

Innovation

Innovation keeps a brand relevant as tastes change. It ranges from new flavors and sizes to renovation, such as recipes with less sugar or simpler ingredients, and occasionally to genuinely new products. Successful innovation lifts the price a brand can charge and brings new buyers in; unsuccessful innovation clutters the shelf, ties up inventory and annoys retailers that gave it space. Companies often report the share of sales from products launched in the past few years as a measure of their innovation engine.

Many large brand owners have been pruning their ranges to focus on what sells. PepsiCo's 2026 plan included trimming close to 20% of its product offerings while launching simpler-ingredient versions of core brands, a sign that the next round of growth was expected to come from fewer, stronger products rather than more of them.

Scale

Scale pays for both. A large brand owner buys media more cheaply, spreads research and development across more sales, negotiates better shelf placement and runs more efficient manufacturing and distribution. That advantage was once close to decisive. Digital advertising and online sales have lowered the cost of building a brand from scratch, which is why insurgent brands now take share in categories that large companies dominated for decades. The article on DTC and Amazon explains how those channels changed the economics of launching a brand.

The same logic applies outside the grocery aisle, with different levers. Restaurants, retailers and luxury houses each express pricing power in their own currency: visits, store choice and exclusivity.

Restaurants: menu price against traffic

A restaurant chain's pricing power shows up in traffic, the number of customer visits. After several years of menu price increases, US fast-food chains saw lower-income customers visit less often, and McDonald's answered in late June 2024 with a $5 meal deal of a McDouble or McChicken, small fries, four McNuggets and a small drink, later extended into December. For a restaurant, the trade-off is sharper than for a packaged brand, because each lost visit also loses the drinks and extras that carry the highest margins. Chains manage it with value menus and limited-time offers at the bottom of the menu while continuing to raise prices on premium items, a restaurant version of price pack architecture.

Retailers: price perception and membership fees

Retailers rarely have pricing power on individual products, which shoppers can compare across stores. Their equivalent is price perception: the shopper's belief that a store is good value, which brings traffic even when some items cost more. Membership retailers show a clearer form of pricing power in their fees. Costco raised its basic US and Canadian membership fee from $60 to $65 in September 2024, its first increase since 2017, with little effect on renewals, because members value the savings on everything else more than the fee.

Luxury: price as part of the product

At the top of the market, the relationship can invert. For luxury brands, a high and rising price is part of what shoppers buy, because it signals exclusivity. Luxury houses raise prices regularly and use scarcity rather than discounts to manage demand. The risk is the opposite of the one mass brands face: if price increases outrun what aspirational buyers can afford, the brand's customer base narrows and growth stalls.

Pricing power is central to a consumer company's equity story, so bankers on both sides of a deal test it with the same evidence: the seller to support the forecast in the management presentation, the buyer to decide how much of that forecast to believe. A typical sequence looks like this:

The decomposition in the first step is explained in the article on organic growth, price, mix and volume. A brand that has taken price repeatedly while holding share and advertising support has demonstrated its pricing power. One that has taken price while losing share, cutting advertising and widening its gap to store brands may be spending its brand equity rather than earning on it.

Why it matters for valuation

Buyers pay more for durable pricing power, because it protects margins against inflation, supports steady growth and reduces the risk in the forecast. Brands with proven pricing power and rising share tend to command higher multiples than brands growing mainly through price while losing volume, and the quality of growth is often debated line by line in a sale process. The Valuation guide's article on retail and consumer valuation covers the methods. The consumer-specific question is always the one Hershey and PepsiCo faced: how much further can price go before shoppers walk away, and what will it cost the brand to keep them?