THE MYSTERY OF BRANDS

Dr. Wolfgang Grassl

Albion CollegeJanuary 10, 2002

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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 ®”

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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 ?

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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

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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) ?

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Marketing sugar and water

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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 ?

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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%

Share in Carbonated Soft AdvertisingDrinks Market, U.S., 2000 Expenditure U.S., 1999

Coca-Cola Co. 44.1% $403MMPepsi-Cola Co. 31.4% $672MM

Coke Classic + Diet Coke 30.8%Pepsi-Cola + Diet Pepsi 18.9%Source: Beverage Digest; Advertising Age

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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

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Customer-based explanation of brand equity

BrandEquity

BrandLoyalty

NameAwareness

PerceivedQuality

BrandAssociations

Other BrandAssets

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

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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 ?

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Brand equity rankings

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World’s most valuable brands, 2001

RANK BRAND BRAND MARKET CAP OF BRAND VALUE BRANDVALUE PARENT COMP., AS % OF MARKET LEVERAGE($MM) JULY 2001 ($MM) CAP, JULY 2001 2001

1 Coca-Cola 68,945 113,000 61.0% 4.182 Microsoft 65,068 380,000 17.1% 3.163 IBM 52,752 198,700 26.5% 0.674 GE 42,396 498,000 8.5% 0.385 Nokia 35,035 104,200 33.6% 1.376 Intel 34,665 202,200 17.1% 1.157 Disney 32,591 60,000 54.3% 1.918 Ford 30,092 45,900 65.6% 0.279 McDonald's 25,289 35,400 71.4% 0.7510 AT&T 22,828 148,950 15.3% 0.3911 Marlboro 22,053 107,300 20.6% 2.2812 Mercedes 21,728 45,350 47.9% 0.5913 Citibank 19,005 268,900 7.1% 0.8614 Toyota 18,578 133,400 13.9% 0.2315 Hewlett-Packard 17,983 55,800 32.2% 0.41

Average 33,934 159,807 32.8% 1.24Source: Interbrand

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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 ?

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World’s most valuable brand portfolios, 2001

RANK BRAND OR BRAND BRAND VALUE WORLDWIDE ADVERTISINGPORTFOLIO VALUE AS % OF MARKET MEDIA SPENDING, EFFICIENCY

($MM) CAP, JULY 2001 2000 ($MM) INDEX*1 Coca-Cola 68,945 61.0% 1,579 43.662 Johnson & Johnson 68,208 48.4% 1,075 63.453 Microsoft 65,068 17.1% 559 116.404 IBM 52,752 26.5% 724 72.865 Procter & Gamble 45,435 54.3% 4,152 10.946 GE 42,396 8.5% 1,754 24.177 Nestlé 41,688 50.4% 1,886 22.108 Unilever 37,847 66.9% 3,665 10.339 Nokia 35,035 33.6% 259 135.2710 Intel 34,665 17.1% 123 281.8311 Disney 32,591 54.3% 1,104 29.5212 Ford 30,092 65.6% 2,323 12.9513 McDonald's 25,289 71.4% 1,404 18.0114 AT&T 22,828 15.3% n/ a n/ a15 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

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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 !), 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

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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

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Realistic explanation of Nike brand

• ecological model - two levels:– subjective– objective

brand equity

consumer

values

marketing

management

cognitive

constraints

product features

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Two alternative explanations of brand equity

CONSUMER

EVALUATION

BRAND BRAND BRAND

AWARENESS LOYALTY EQUITY

PROMOTION

(ADVERTISING)

CONSUMER COGNITIVE

EVALUATION CONSTRAINTS

BRAND BRAND BRAND

AWARENESS LOYALTY EQUITY

PROMOTION PRODUCT

(ADVERTISING) FEAUTURES

(a) Conceptual Model of Idealism

(b) Conceptual Model of Realism

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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

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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”)

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… 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

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… 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

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Old view: positioning maps

•

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New view of brands: brand molecules

• brands as molecules“single” brand brand portfolio

“spill-overs” from other (“contiguous”) brands

master brand

parent company

brand extensions

core asso-ciations

“spill-over” associations

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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 ofbranding potential

– every product category allowsfor a finite number of niches

– niches can be empty

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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)

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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

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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”