The Virgin brand name appears on compact disks, airplanes, online games, health and fitness clubs, and soft drinks. Why? Brand extensions facilitate new product introductions. Consumers are able to draw upon their experiences with the brand to imagine what the new product would be like.
For instance, if Virgin were to open a casino, people might imagine it to be loud, bright and exciting—much like the products that are already affiliated with the brand. Therefore, introducing a casino under the Virgin name should be less costly than convincing people of the attractiveness of a casino with a new brand name.
Research shows, consistent with this expectation, that brand extensions obtain greater introductory market share than do new brands. What's more—they do so with less marketing investment.
Ideally, a company can obtain both market share and a price premium for its brand extensions. How much more you would pay for Tide fabric softener over the $4.99 Gust fabric softener? A Sony laptop computer instead of a $500 model made by Bluetone? Or a Nike tennis racket in favor of a $99 Graysyn racquet? The additional amount that you will pay to get a brand extension by Tide, Sony, or Nike rather than buy an average (or in this case, fictitious) brand reflects the price premium the brand extension can obtain.
The question for the manager of an existing brand becomes one of identifying product categories in which healthy premiums may be obtained. One driver of price premiums is the quality of the brand. Consumers are unlikely to pay a premium for an extension produced by a substandard brand.
A second driver of price premiums lies in identifying product categories that "fit" with the existing brand. Despite its popularity, Nike is unlikely to induce consumers to pay a premium for Nike laundry detergent, as it doesn't fit with Nike in terms of manufacturing expertise or brand image.
Tide fabric softener, Sony laptops, and Nike tennis rackets are examples of respected brands that appear to fit the extension product categories. Yet, you were likely to differ in the percentage premium you were willing to pay to obtain these products. So what else accounts for consumers' willingness to pay for brand extensions?
Price premiums are also driven by the risk that is inherent to the product category. We conducted an experiment that developed new product concepts to assess the role of brand extension fit, and also to assess three types of risk in determining consumers' willingness to pay price premiums for extensions by favorably perceived brands.
For example, financial risk reflects the monetary commitment made in purchasing the product. Financial risk is captured in the purchase price and terms of payment. Higher prices and more "upfront money" increase financial risk.
Performance risk stems from possible harm to the user or the user's property (imagine a vacuum cleaner that may occasionally damage rugs).
Finally, social risk is present to the extent that others are able to evaluate your purchase decision. Thus, products that are consumed in public, particularly those that are visibly branded, carry high social risk.
In our study, price premiums reflect the willingness to pay for an extension over the price of an "average" product in the category. Not surprisingly, the results indicate that brand extensions are rewarded a price premium when they fit with the extension category.
What is more interesting is that fit alone is not enough to ensure a price premium for a strong brand. In conditions of low risk, participants were not willing to pay more for an extension by a strong brand even when the brand/category fit was high. Rather, price premiums emerged only when the brand fit the extension category and either financial or social risk was high.
Significance of Findings
The influence of variables relating to both brand and product category characteristics on perceptions of brand extensions has been previously investigated. However, what's less explored is the impact of such variables on price premiums.
Consideration of price premiums is particularly relevant due to the importance of this variable in models assessing the financial value of brands. Our research augments previous work by highlighting specific product category characteristics that are likely to affect the financial contribution of brands and, hence, assessments of their value.
For brand managers, this research suggests strategies for extension category selection and brand extension pricing. Established brands that extend into categories that are relatively low in risk should not expect to be rewarded with premium prices. Rather, in product categories defined by low risk, price premiums are likely to be the hard-fought result of heavy investments in advertising and/or the development of a highly superior product. Thus, strong brands, even when fit with the category is high, should be careful to consider the consequences of introducing a product that may be forced to compete primarily on the basis of price.
The results also highlight the importance of the social risk inherent in the purchase and use of products. As expected, consumers appear willing to pay a premium to mitigate social risk. Therefore, brands should be rewarded if managers can expand the domain of publicly consumed products that are visibly branded. Brand managers should strive to make brand names and/or marks more visible on the array of less public products found within consumers' homes.
Additional Sources of Information
- Dacin, Peter A. and Daniel C. Smith (1994), "The Effect of Brand Portfolio Characteristics on Consumer Evaluations of Brand Extensions," Journal of Marketing Research 31 (May): 229-242.
- Smith, Daniel C. and C. Whan Park (1992), "The Effects of Brand Extensions on Market Share and Advertising Efficiency," Journal of Marketing Research 29 (August): 296-313.
This article is excerpted from the authors' original article, "Consumer Willingness to Pay Price Premiums for Brand Extensions: The Role of Extension Category Characteristics," which appeared in the Journal of the Academy of Marketing Science 33 (April 2005). This excerpt originally appeared on the Web site of the Association of Consumer Research (ACR). For more information, visit www.acrwebsite.org.
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