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THE MYSTERY OF BRANDS Dr. Wolfgang Grassl Albion College January 10, 2002 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 ®” 2 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 ? 3 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 4 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) ? 5 Marketing sugar and water 6 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 ? 7 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 ? Coca-Cola Co. Pepsi-Cola Co. Share in Carbonated Soft Drinks Market, U.S., 2000 44.1% 31.4% Coke Classic + Diet Coke Pepsi-Cola + Diet Pepsi Advertising Expenditure U.S., 1999 $403MM $672MM 30.8% 18.9% Source: Beverage Digest; Advertising Age – Why has General Motors struggled with its portfolio of brands for about forty years ? GM market share in U.S.: 1991: 36%, 2001: 28% 8 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 9 Customer-based explanation of brand equity Brand Loyalty Name Awareness Perceived Quality Brand Associations Other Brand Assets Brand Equity Provides value to customers by enhancing customers’ Provides value to firms by enhancing: * interpretation and processing of information * confidence in the purchase decision * use satisfaction * efficiency of marketing programs * brand loyalty * prices/margins * brand extensions * competitive advantage 10 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 ? 11 Brand equity rankings 12 World’s most valuable brands, 2001 RANK BRAND 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Coca-Cola Microsoft IBM GE Nokia Intel Disney Ford McDonald's AT&T Marlboro Mercedes Citibank Toyota Hewlett-Packard Average BRAND MARKET CAP OF BRAND VALUE BRAND VALUE PARENT COMP., AS % OF MARKET LEVERAGE ($MM) JULY 2001 ($MM) CAP, JULY 2001 2001 68,945 113,000 61.0% 4.18 65,068 380,000 17.1% 3.16 52,752 198,700 26.5% 0.67 42,396 498,000 8.5% 0.38 35,035 104,200 33.6% 1.37 34,665 202,200 17.1% 1.15 32,591 60,000 54.3% 1.91 30,092 45,900 65.6% 0.27 25,289 35,400 71.4% 0.75 22,828 148,950 15.3% 0.39 22,053 107,300 20.6% 2.28 21,728 45,350 47.9% 0.59 19,005 268,900 7.1% 0.86 18,578 133,400 13.9% 0.23 17,983 55,800 32.2% 0.41 33,934 159,807 32.8% 1.24 Source: Interbrand 13 This means … • brand leverage = brand value in relation to the previous year’s brand sales – the higher the leverage the more value is being generated from each dollar of sales • results – among the most valuable brands, the share of brand value in market capitalization is as high as 71.4% (McDonald’s) or as low as 7.1% (Citibank) – brand leverage is low for manufacturers of investment and capital goods (Toyota, Ford, GE, HP, Mercedes, IBM) but very high for manufacturers of consumer goods and service businesses (Coca-Cola, Microsoft, Marlboro, Disney) why ? -- management issue or systemic explanation ? 14 World’s most valuable brand portfolios, 2001 RANK 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 BRAND OR PORTFOLIO BRAND BRAND VALUE WORLDWIDE ADVERTISING VALUE AS % OF MARKET MEDIA SPENDING, EFFICIENCY ($MM) CAP, JULY 2001 2000 ($MM) INDEX* Coca-Cola 68,945 61.0% 1,579 43.66 Johnson & Johnson 68,208 48.4% 1,075 63.45 Microsoft 65,068 17.1% 559 116.40 IBM 52,752 26.5% 724 72.86 Procter & Gamble 45,435 54.3% 4,152 10.94 GE 42,396 8.5% 1,754 24.17 Nestlé 41,688 50.4% 1,886 22.10 Unilever 37,847 66.9% 3,665 10.33 Nokia 35,035 33.6% 259 135.27 Intel 34,665 17.1% 123 281.83 Disney 32,591 54.3% 1,104 29.52 Ford 30,092 65.6% 2,323 12.95 McDonald's 25,289 71.4% 1,404 18.01 AT&T 22,828 15.3% n/a n/a Marlboro 22,053 20.6% n/a n/a Average 41,659 40.7% 1,585 64.73 * = (Brand Value / Media Spending) Sources: Global Advertising Age; Interbrand 15 The picture seems to solidify … • at the level of brand portfolios, too, there is no clear relationship between the level of advertising expenditure and brand value – r = -0.1279 (inverse relationship !), r2 = 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 16 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) brand equity • 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” 17 Realistic explanation of Nike brand consumer values marketing management brand equity cognitive constraints product features • ecological model - two levels: – subjective – objective 18 Two alternative explanations of brand equity CONSUMER EVALUATION BRAND AWARENESS BRAND LOYALTY BRAND EQUITY PROMOTION (ADVERTISING) (a) Conceptual Model of Idealism BRAND AWARENESS CONSUMER EVALUATION COGNITIVE CONSTRAINTS BRAND LOYALTY BRAND EQUITY PROMOTION (ADVERTISING) PRODUCT FEAUTURES (b) Conceptual Model of Realism 19 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: J & J: Pierre Cardin: Virgin: Bic: jeans wear > dress suits (but: Dockers, Slates) baby oil > perfume fashion wear > dishware record label > cola pens, disposable razors > pantyhose > perfumes 20 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 products, 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”) 21 … 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 22 … 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 23 Old view: positioning maps • 24 New view of brands: brand molecules • brands as molecules “single” brand “spill-over” associations core associations brand portfolio master brand parent company brand extensions “spill-overs” from other (“contiguous”) brands 25 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 26 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) 27 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 28 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” 29