1. THE MYSTERY OF BRANDS Dr. Wolfgang Grassl Albion College January 10, 2002

2. 2 Question what does the following symbol mean to you ? ….. little girl in the rain with an umbrella which brand does the following tag line stand for ? ….. “when it rains it pours ® ”

3. 3 And the answer is … salt is a relatively simple commodity -- how come most of us seem to know any brand of salt at all ? there seems to be little to tell about the qualities of salt, the product having few cues by which to store it in our semantic memory isn’t marketing salt simply selling sodium chloride ?

4. 4 Marketing sodium chloride quite on the contrary: for the marketer, that’s where the challenge starts ! Morton’s share of about 50 % of the U.S. market achieved by –(1) stability of brand (“stable brand personality”) –(2) introducing a higher degree of product differentiation  Morton Lite Salt ®  Morton ® Kosher Salt  Morton ® Salt Substitute  Morton ® Popcorn Salt  Morton ® Canning and Pickling Salt brands –(3) accepting a low price difference in comparison with private-label salt

5. 5 What can we learn from this ? enormous importance of brand-building financial importance of brands everything can be marketed -- but can everything be branded ? –air ? –sand ? branding of –products (goods and services) –personalities –ideas –places how do you market water and sugar (together) ?

6. 6 Marketing sugar and water

7. 7 This raises questions … Why are some companies able to establish a clear-cut competitive position for their product in the mind of market participants, while others never do so ? –“Cola wars” –McDonald’s vs Burger King –Oldsmobile brand How do you differentiate your product from that of your competitors in a way that is important to the target customer segment ? How do you turn a brand advantage into profitability ? What are the rules of successful branding ?

8. 8 The biggest question of all is … What are the rules of successful branding ? –What makes Coca-Cola, Levi’s, or Cartier strong brands ? –Why does Pepsi seem unable to catch up with Coke ? –Why has General Motors struggled with its portfolio of brands for about forty years ?  GM market share in U.S.: 1991: 36%, 2001: 28%

9. 9 Nature and function of brands nature of brands –products-plus (“mystery”) –higher level of complexity function of brands –consumers  convey information (“BMW: The Ultimate Driving Machine”)  instill trust (“you know what you can expect”) –marketers (producer brands vs store brands)  higher degree of product differentiation  stronger brand loyalty  higher mark-ups  higher profitability  unique company profile: differentiation on market  brand equity = value of brands (surplus value over non-branded products) set of assets (or liabilities) linked to the brand that adds (or subtracts) value

10. 10 Customer-based explanation of brand equity Brand Equity Brand Loyalty Name Awareness Perceived Quality Brand Associations Other Brand Assets Provides value to customers by enhancing customers’ *interpretation and pro- cessing of information *confidence in the pur- chase decision *use satisfaction Provides value to firms by enhancing: *efficiency of marketing pro- grams *brand loyalty *prices/margins *brand extensions *competitive advantage

11. 11 Understanding the customer-based view brand equity is determined by the customer –culmination of the customer’s assessment of  the product  the company  other variables that impact on the product –brand equity exclusively subjective (“in the eye of the beholder”) –brand equity can largely be influenced by marketing management ad libitum (and mainly through advertising)  assumes infinite plasticity of mind  brands seen in isolation from one another –in philosophical terms: idealist view (structures of reality are at the behest of the observer or actor)  is this really the whole story ?

12. 12 Brand equity rankings

13. 13 World’s most valuable brands, 2001

14. 14 This means … brand leverage = brand value in relation to the previous year’s brand sales –the higher the leverage the more value is being generated from each dollar of sales results –among the most valuable brands, the share of brand value in market capitalization is as high as 71.4% (McDonald’s) or as low as 7.1% (Citibank) –brand leverage is low for manufacturers of investment and capital goods (Toyota, Ford, GE, HP, Mercedes, IBM) but very high for manufacturers of consumer goods and service businesses (Coca-Cola, Microsoft, Marlboro, Disney)  why ? -- management issue or systemic explanation ?

15. 15 World’s most valuable brand portfolios, 2001

16. 16 The picture seems to solidify … at the level of brand portfolios, too, there is no clear relationship between the level of advertising expen- diture and brand value –r = -0.1279 (inverse relationship !), r 2 = 0.0163 –strong corporate brands like Intel, Nokia, Microsoft and IBM enjoy a high advertising efficiency, umbrella brands like P&G and Unilever (expectedly) a low one –but why do McDonald’s and Ford (which have the highest and second-highest brand leverage among the 15 brands) lag so far behind ?  systematic relationship sales  brand value but not advertising  brand value hypothesis: advertising is not a strong but a weak force in determining brand equity

17. 17 Implications customer-based view (“brand idealism”) called in question –degree to which products can be branded does not depend on marketing management alone (or not even primarily on it) alternative: “brand realism” –rooted in ecological psychology and evolutionary theory  “adaptive marketing” –philosophically: brands have a reality in addition to the products they inhere in -- they are not just “products-plus” brand equity

18. 18 Realistic explanation of Nike brand ecological model - two levels: –subjective –objective brand equity consumer values marketing management cognitive constraints product features

19. 19 Two alternative explanations of brand equity

20. 20 Further evidence brand extension research –“stretching” of a brand into a different product category  more than 80% of NPD either brand extensions  vast majority of brand extensions are failures  successful Calvin Klein: clothing > perfume > underwear Jell-O: dry mix box > ready-to-eat dessert > yogurt > ice pops Virgin: record label > retail entertainment chain > airline > tour operator > multimedia production  unsuccessful Levi’s: jeans wear > dress suits (but: Dockers, Slates) J & J: baby oil > perfume Pierre Cardin: fashion wear > dishware Virgin: record label > cola Bic: pens, disposable razors > pantyhose > perfumes

21. 21 And this means ? consumer perception cannot be arbitrarily manipulated and brands cannot be arbitrarily stretched without diluting the master brand –consumers are “hardwired” (tastes for sugar and fat, etc.)  ca. 3,000 marketing messages bombard the human mind every day: why do only few directly affect our consumer behavior ? –consumers have cognitive constraints (complexity of pro- ducts, differentiation, distance old-new category, etc.)  example: flop of Crystal Pepsi –“laws” of brand extension: extendibility enhanced if  contiguity in perceptual space  perceptual fit of core associations with product category  low degree of category domination (“prototypes”)

22. 22 … and further it means that … there are regularities governing the degree to which products lend themselves to becoming strong brands –“niches” in product space (space not continuous but discrete)  niche = specific combinations between product features and cognitive constraints in consumers that enable a “fit” in some but not in other cases niches constrain or accommodate brands –nature of “boundaries” surrounding a brand (co-) determine extendibility and lastly brand equity  Federal Express “owns” the association “overnight”, Volvo “safety” –“brandscape” (= landscape of interrelated brands) rather than brands in isolation  associations affect other brands

23. 23 … and lastly that … even the best marketing management and the largest advertising budget cannot brand what the structures of product space do not make “brandable” in the first place –complexity of brands (= number of features by which we differentiate products) determines number of potential niches in any product category consequence: new understanding of brands necessary –positioning maps  brand molecules  brands not discrete but continuous  surrounding product space not continuous but discrete

24. 24 Old view: positioning maps

25. 25 New view of brands: brand molecules brands as molecules “single” brandbrand portfolio “spill-overs” from other (“contiguous”) brands master brand parent company brand extensions core asso- ciations “spill-over” associations

26. 26 Niches brand equity is a function of the degree to which brands can be “moored” in niches –accommodation, boundaries and “defendability” ecological niches –environment (= product space) determines degree of branding potential –every product category allows for a finite number of niches –niches can be empty

27. 27 The “underworld” of brands brand associations often below threshold of consciousness –cognitive constraints “above ground”: consumer decisions analogy: mycelium of a fungus Mycelium of Matsutake mushroom (hyphae)

28. 28 Is this new view of brands more promising ? opens up an interdisciplinary research program –ecological contexts (biology, psychology) –complexity theory (mathematics, computer science) –ontology (philosophy, artificial intelligence) –product differentiation (economics) better fit with empirical data about branding and advertising better explanation of brand management strategies –co-branding  Subaru markets L.L. Bean Outback station wagon  Dell stamps Microsoft and Intel logos on its computers  credit card co-branded by Visa, Citibank and American Airlines –brand extension

29. 29 New view of marketing old view: marketing is a battle over perceptions, not products –but: why did “New Coke” fail in 1985 ?  Coca-Cola Co. conducted 200,000 taste tests that showed that “New Coke” tasted better than Pepsi-Cola and than “Coke Classic”  consumers did not accept a cola that tasted too much like Pepsi new view: marketing is more than about perception –it requires a study of the total environment in which we live and act –“naturalistic turn”