WHAT ARE THE CHANCES AND RISKS OF BRAND EXTENSIONS

WHAT ARE THE CHANCES AND RISKS OF BRAND EXTENSIONS STRATEGIES

AND WHAT ARE THE CRUCIAL SUCCESS FACTORS FOR BRAND EXTENSIONS

Holger Langlotz (2008), BU3510 Marketing Management; Trinity College, The University of Dublin

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Table of Contents

1. Introduction and broader context

2. Definition, basic assumptions and relevance

3. Why brand extension can be an adequate strategy: chances p. 3 p. 4 p. 5

4. Why brand extension is not always the appropriate way: inherent risks p. 8

5. Crucial success factors p. 11

6. Conclusions p. 15

Bibliography p. 16




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1. Introduction and broader context

Total costs of introducing a new brand in consumer markets are likely to amount to triple-digit million Euro figures

1

, incorporating a significant financial risk for consumer goods manufacturers

2

. However, due to ever higher competitive pressure enterprises have to accomplish growth by introducing new products while cutting product introduction costs.

Therefore established brands are often used to launch new products as managers and marketers see this as a promising way to achieve cost cutting goals while facilitating initial sales. For example, Unilever reduced its portfolio from 1600 to only 400 brands, significantly increasing the share of brands with annual sales above Euro 1 billion

3

.

Brand transfer strategies

4

like brand extension are especially popular for non-durable consumer goods

5

. However, failure-rates of brand transfers among non-durable consumer goods at about 70% are not uncommon

6

. Popular failures include Levi’s suits, Kleenex diapers, or Xerox computers, showing that even extensions of very successful brands can fail

7

.

Therefore this work investigates which chances a brand extension strategy provides, but also which risks are inherent if it fails. Furthermore the most crucial success factors regarding brand extensions are analyzed in this critical review of the academic literature.

1 Tauber (1988) estimates $ 150 million.

2 Aaker and Keller (1990), p. 27.

3

E.g. Lipton, Knorr, Dove, Axe and Rexona; Chwallek (2003).

4

According to Sattler (2000, pp. 1-4) brand transfer / brand stretching means to use an established brand for a new product, aiming to transfer customer perceptions regarding brand image as well as publicity to the new product. Different kinds of brand stretching strategies are distinguished, referring to:

- Product category (e.g. line extension: brand transfer to a product within the same product category, for example Diet Coke),

- Regional distance (e.g. if customers in a second country have knowledge about the brand in the country of origin),

- Origin of the brand (e.g. in-house vs. acquired brand),

- Type of instruments used (e.g. same vs. different product or packaging design, or using the same brand vs. only referring to an established band, e.g. in case of the mergers of Heochst and Rhone Pulenc or Ciba and Sandoz attributes of the old brands should be transferred to the newly created brands Aventis and Novartis, respectively).

5 Rangaswamy, Burke, and Oliva (1993), p. 61.

6

Wieking (2006).

7

Aaker (1990), p. 50 ff. and Keller (2003), p. 599.




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2. Definition, basic assumptions and relevance

One of several brand transfer strategies is brand extension. It can be defined as using an existing brand name for introducing a new product in a completely different product class / category

8

. Examples include Jello frozen pudding pops, Clorox laundry detergent, Ivory shampoo, or NCR photocopiers

9

.

The rationale for brand extensions builds on the assumptions that consumers’ associations with the current brand can be transferred to the extension, fostering its success. This includes the possibility of transferring “association with a use situation, a type of product user, a place, or a product class”

10

(e.g. Lowenbrau and relaxing with good friends, Mercedes and wealthy, discriminating people, or Toyota and Japan, as well as Budweiser, Chevrolet, Levi's, and

Bank of America and product class associations) as well as product attributes or characteristics (e.g. Viva towels and durability, BMW cars and performance, and Apple and userfriendliness).

Therefore it is fundamental for brand extension strategies’ success that the most important basic assumptions about relevant consumer behavior, namely

- Positive believes and favorable attitudes towards the original brand exist in customers’ minds,

- which foster creating favorable beliefs and attitudes toward the extension,

- And “negative associations are neither transferred to nor created by the [...] extension”

11

, are fulfilled

12

.

Between 1977 and 1984 the share of non-durable consumer goods launched under new brands was approximately 40%

13

, whereas in 1990 this share had declined to only 10%

14

.

This proves the increasing relevance of brand transfer strategies.

8 According to Aaker and Keller (1990), p. 27; and Swaminathan, Fox, and Reddy (2001), p. 1.

9

Aaker and Keller (1990), p. 27.

10

Aaker and Keller (1990), p. 28, referring to Aaker (1982).

11

Aaker and Keller (1990), p. 28

12 Aaker and Keller (1990), p. 28.

13

Aaker and Keller (1990), p. 27

14

Rangaswamy, Burke, and Oliva (1993), p. 61




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3. Why brand extension can be an adequate strategy: chances

The popularity of marketing new products as brand extensions is due to the fact that researchers as well as managers observe a variety of opportunities compared to launching a new brand. Sattler

15

outlines the benefits listed below.

Cost advantages are caused by using the image and knowledge about the parent brand, which can to some extent be transferred to the extension. For example, core image dimensions, or general quality perceptions about a brand could be successfully transferred in the past. E.g. care or taste in case of Nivea or Coke, respectively, were transferred to Nivea

Lipstick and Diet Coke

Particularly with low involvement products a high degree of brand awareness can be enough to make consumers buy a new product

16

. Swaminathan, Fox, and Reddy

17

show that parent brand experience significantly increases extension trial. Thus extension strategies should first hand reduce product introduction costs. As marketing communication costs to foster brand awareness and build a specific product image are increasing increasingly important. Empirical research for the US

19

18

, these advantages become

and a survey among managers

20

show that advertising costs per sold item of consumer goods are twice as high for products launched under a new brand compared to brand extensions. Sullivan

21

reports similar findings .

Furthermore, advertising efforts for a highly integrated brand can positively affect all products offered under this brand.

In addition name and trademark creation are omitted by using a current brand, resulting in time and money savings and diminishing the risk of legal actions taken against the company in terms of intellectual property rights infringement, which increases financial savings an hinders damage towards the company’s image

22

.

15

Sattler (2000), p. 17.

16 Sattler (2000), pp. 5-7.

17 Swaminathan, Fox, and Reddy (2001), p. 14.

18

Sattler (2000), pp. 5-7.

19

Smith and Park (1992).

20

Sattler (1997).

21 Sullivan (1992).

22

E.g. L’Oreal had to pay US$ 2.1 mio. for illegally using the brand Zazu; according to Keller (1998), p. 458, referring to Alsop (1988).




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Transferability of brand awareness and image to a new product could increase initial sales volumes by creating higher consumer acceptance, e.g. in case of Nivea Beauté

23

. This is in line with research showing that consumers having no personal experience or knowledge regarding a product’s quality are likely to use brand perceptions as quality indicator

24 . This explains why brand experience fosters extension trial, but has no impact on repeat purchases

25

: After having tried a product consumers are able to judge the product according to their experience. Furthermore Erdem

26

and Wernerfelt

27

suggest that the established brand reduces the perceived risk of trying a new product by providing quality assurance.

Brand transfer can also increase sales volumes by establishing a system thought. E.g. to use hair shampoo, conditioner and hairspray of the same brand might - in the consumer’s eyes - lead to better results than using products of different brands

28

.

Due to consumers’ knowledge about the parent brand’s image and name recognition can be leveraged to the new market, which can significantly reduce new product failure rates. This makes extensions attractive particularly for companies confronted with high new product failure rates

29

. Sullivan

30

shows the effect of extension failure risk reduction especially for a later launch in the product life cycle of non-durable consumer goods.

In addition, not only the extension but also the parent brand can benefit as reciprocal effects may positively affect the parent brand and all its products, if the extension is successful. This might lead to increasing customer acceptance for the whole brand

31

. E.g., Kesler

32

reports

Sunkist extensions lead to positive reciprocal effects for the parent brand in terms of name recognition and favorable associations about health and vitality.

Generally, significant positive changes in a brand’s evaluation are limited to less well regarded brands

33

, due to the already high evaluation of successful brand. Furthermore, as parent brand sales are already maximized among highly loyal purchasers, positive reciprocal effects in terms of higher sales especially occur among prior nonusers and nonloyal users.

However, among prior non-users and consumers with low to moderate brand loyalty the experience of extensions can foster brand familiarity, lead to stronger brand attitudes and therefore change brand evaluation and increase the likelihood of purchasing the parent brand, eventually causing increases in market share of the parent brand

34

.

If the extension is a failure, negative reciprocal effects towards the parent brand are better absorbed if the parent has a very strong market position. E.g., defective Intel chips negatively affected the brand, but were no threat in the long run

35

.

Additionally, facilitated access to the retail market and lower costs for gaining distribution

36 could result out of higher customer demand causing pull effects with retailers. Furthermore retailers should avoid creating the impression that their assortment is incomplete due to listing only some but not all products of one brand. It is also assumed that image transfer and stronger awareness might not only be gained with customers, but also with retailers themselves

37

.

23 Sattler (2000), p. 8.

24

Rao, Qu, and Ruekert (1999).

25

Swaminathan, Fox, and Reddy (2001), p.9.

26 Erdem (1998).

27 Wernerfelt (1988).

28 Sattler (2000), p. 8; and Schiele (1997), p. 197.

29


30 Sullivan (1992).

31 E.g. Keller (1998), pp. 458 ff.; or Smith and Park (1992), p. 298.

32

Kesler (1987).

33

Keller and Aaker (1992).

34

Swaminathan, Fox, and Reddy (2001), pp. 1-12.

35 Sattler (2000), p. 9.

36

Morein (1975).

37

Sattler (2000), p. 10.




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Furthermore, extensions provide the possibility to bypass legal advertising restrictions.

Popular examples are Camel shoes / clothing, or Marlboro journeys

38

.

Transferring image and brand awareness of phasing-out products to successors is the only possibility to uncouple product life cycle and brand life cycle and use the capital invested in a brand longer than for only one product life cycle

39

.

38

Sattler (2000), p. 9.

39

Sattler (2000), p. 10.




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4. Why brand extension is not always the appropriate way: inherent risks

Though brand extensions provide a variety of chances, they also evoke a number of risks.

Sattler

40

provides the following overview:

First hand, a risk of conducting brand extension strategies is the uncertainty about degree to which it will be eventually successful

41

. Further risks regarding negative effects towards the parent brand arise, especially if an extension fails.

The most important risk of conducting a brand extension strategy is the appearance of negative reciprocal effects in case of extensions failing to meet consumers’ expectations or being inconsistent with consumers’ feelings or attitudes about and image of a brand

42

. I.e. the image of the parent brand can be diluted by and suffer from the extension, thus harming brand equity and causing decreasing sales for some or all products offered under the respective brand

43

. Four cases of reciprocal effects towards the brand image can be distinguished, as stated in the table below.

40

Sattler (2000), p. 17.

41

Sattler (1998).

42 e.g. Keller and Sood (2000); Loken and Roedder-John (1993); Milberg, Park, and McCarthy (1997);

Sullivan (1990); and Swaminathan, Fox, and Reddy (2001), pp 11-19

43

Sattler (2000), pp. 12-13.




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Though negative reciprocal effects are particularly likely if the extension is a failure, they can even occur in case of a successful extension

44

.

Furthermore, negative effects should be strongest if category similarity is high. But even under conditions of relatively little similarity to the parent brand they are not precluded

45 .

The impact of negative reciprocal effects tends to be strongest among frequent users of the parent brand as the propensity to buy the parent brand cannot decline among prior nonusers

46 .

However, the risks of brand extensions do not stop at the parent level. Roedder John, Loken, and Christopher

47

state that not only the parent brand, but also beliefs about single products can be diluted due to an extension’s inconsistency with attitudes towards the parent brand.

This might cause decreasing sales as well as further damage to the parent brand. The stronger attribute beliefs about a single product are the less likely are these beliefs to be diluted, with the flagship product

48

appearing to be completely resistant against negative reciprocal effects. This also implies that beliefs about the flagship product are generally more resistant to change than beliefs about the parent brand itself

49

.

The other way round, beliefs about or associations with the parent brand can be harmful to the extension as some attributes highly valued in one product class can be associated with low quality in other segments

50

. For example, thickness indicates high quality in tomato based juices, whereas it is associated with inferior quality with children’s fruit-flavored drinks, or pulp is associated with high quality in orange juice, but with low quality in apple juice

51

. But such negative associations could be counteracted by emphasizing attributes of the extension, particularly such ones that are inconsistent with the potentially damaging attribute, rather than referring to attributes of the parent brand

52

.

Overall, choosing the wrong extension can result in damaging associations, attributes and beliefs about the brand, causing serious damage to the brand and therefore to an important asset. Such damage might be impossible to heal or only be healed with huge (financial) effort

53

.

Another disadvantage of brand extension strategies is the increased difficulty of positioning a product towards a specific target segment, due to the high degree of brand integration. This is due to the fact that the new product is bound to the core image-dimensions of the brand as otherwise the brand could suffer. E.g. offering a color-saving mild detergent under the brand of a laundry detergent known for its bleaching effect might cause negative reciprocal effects towards the established product

54

.

The higher the number of products offered under one brand, the more coordination effort is needed for all marketing and advertising activities as it has to be considered that the mentioned synergies cause reciprocal effects towards every product offered under the brand

55

.

44

Sattler (2000), pp. 12-13.

45


46 Swaminathan, Fox, and Reddy (2001), pp. 3-12.

47 Roedder John, Loken, and Christopher (1998), pp. 24-30.

48 In this context the term flagship product refers to the product with which the brand is associated most closely by consumers, e.g. Ivory (soap), American Express (credit cards), Betty Crocker (cake mix), or

Johnson & Johnson (baby shampoo).

49

50

Roedder John, Loken, and Christopher (1998)

51

Aaker and Keller (1990).

52

Zeithaml (1988).

53

54

Aaker and Keller (1990), pp. 27 and 37.

Aaker and Keller (1990), pp. 27-28.

55

Sattler (2000), p. 14.

Sattler (2000), p. 14.




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Additionally, cannibalization effects can occur if a substitute product is offered under the same brand. I.e. sales volumes of one or more products offered under the brand could suffer due to the launch of the brand extension product. This raises problems especially if losses in sales extend sales generated by the brand extension. Nevertheless, generally the same problem occurs, if a new product is launched under a separate brand

56

.

56 Aaker and Keller (1999), p 40 and & [Brand stretching: Chancen und Risiken by: Sattler, H.

(2000) erschienen in: „Erfolgsfaktor Marke. Neue Strategien des Markenmanagements“ by

Köhler, R., Majer, W., Wiezorek, H. P, p. 15 ] .




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5. Crucial success factors

There are several critical success factors influencing the degree to which a brand extension strategy is successful. First hand, these factors influence if the extension becomes a success story or a failure. Additionally, these factors also affect the extent and quality of reciprocal effects towards the parent brand and products offered under it. Sattler, Völckner and

Zatloukal

57

outline the success factors shown below.

In the following the most important of these interrelations are elaborated in more detail.

Apart from transfer product and parent brand, fit and quality perception are the main success factors for brand extensions

58

. Aaker

59

also points out the high relevance of fit along with perceived parent brand quality as well as consumers’ perceived difficulty of making the extension. Völckner and Sattler

60

add four more factors with considerably above average relevance, which are marketing communication efforts (i.e.advertising), retailer acceptance of the extension (i.e. availability at retailers), involvement with the parent brand, and intensity of parent brand experience. All other factors are supposed to have significantly lower relevance regarding brand extension success.

Nevertheless, it must be taken into account that different studies show varying results about the influence of these success factors

61

.

High quality perceptions about the parent brand tend to increase the extension’s perceived quality

62

.

Fit relates to the similarity of various dimensions of the parent brad/product and the extension, including similarity of product attributes, product capacities and features, perceived quality,

57 Sattler, Völckner and Zatloukal (2003); Völckner and Sattler (2006a); and Völckner and Sattler

(2006b).

58

59

Zatloukal (2000).

60


61

Völckner und Sattler (2006a).

E.g. the study by Aaker and Keller (1990) and its replications by Sunde and Brodie (1993), Nijssen and Hartmann (1994), Holden and Barwise (1995), Bottomley and Doyle (1996), Nijssen and Bucklin

(1998), as well as Lye, Venkateswarlu and Barrett (2001) provide different findings about the impact of fit and MUTTERMARKENSTÄRKE on the success of the extension product .

62





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complementary and possibility of substitution, assumed manufacturing expertise, as well as brand concept competency

63

. Aaker

64

concentrates the various dimensions of fit with

“complement” (i.e. to what extent are the products jointly consumed, e.g. Ski and ski clothing) and “substitute” (i.e. to what extent do the products replace each other, e.g. ski and snowboard) from a demand side perspective as well as “transfer” (i.e. consumers’ perception about the manufacturing capability as a result of manufacturing the parent product) from a supply side perspective.

An extension is more likely to be successful, if consumers recognize high technical and emotional similarity, or in other words if they recognize a high degree of fit between parent and extension

65

. This is the case because consumers are most likely to transfer their associations about the parent to the extension if they perceive a high degree of similarity between them

66

. This is in line with several theoretical findings like cognitive consistency

67 stimulus generalization

68

, affect transfer

69

, or categorization theory

70

.

Furthermore a high degree of fit fosters the likelihood of positive reciprocal effects

71

,

. On the other hand, if fit is low that “may actually stimulate undesirable beliefs and associations.”

72

The moderating role of category similarity or perceived fit on positive as well as negative reciprocal effects is shown in various research

73

. Overall, reciprocal effects are influenced by category similarity and the degree to which an extension is successful on the market.

Swaminathan, Fox, and Reddy

74

provide the following overview:

Furthermore, if consumers perceive difficulty of designing and making the extension to be high, the likelihood of the extension to be a success is positively affected. But if extensions are regarded as too easy to make or incongruent with a high quality brand, consumers might reject them

75

.

63

Sattler and Völckner (2007), p. 13.

64


65 Tauber (1988); Aaker and Keller (1990), p. 38; and Sattler and Völckner (2007), p. 8

66 Sattler and Völckner (2007), p. 9.

67 Osgood and Tannenbaum 1955; Heider 1958.

68

McSweeney and Bierley 1984; Bierley, McSweeney, and Vannieuwkerk 1985.

69 Wright 1975.

70 Fiske 1982; Sujan 1985; Fiske and Pavelchak 1986; Cohen and Basu 1987.

71


72


73

E.g. Aaker and Keller (1990); Gurhan-Canli and Maheswaran (1998); Keller and Sood (2000); and

Milberg, Park, and McCarthy (1997).

74

75

Swaminathan, Fox, and Reddy (2001), p. 3.

Aaker and Keller (1990), pp. 30 and 38-39.




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Competition as well as retailer acceptance are further important drivers of extension success

76

.

Another important success factor is customers’ experience with the parent brand.

Swaminathan, Fox, and Reddy

77

find that experience with the parent brand significantly increases the likelihood of extension trial, but does not influence extension repeat.

Furthermore, parent brand experience determines the impact of reciprocal effects on buying behavior as positive reciprocal effects on buying behavior are limited to consumers with low to moderate loyalty, whereas negative reciprocal effects are limited to current users of the parent brand

78

.

Beside these specific brand attitudes consumers’ overall global assessment of the parent brand’s quality is an important success factor

79

. This overall brand attitude comprises of certain attitudes (e.g. durability, serviceability, or performance) as well as of abstract non measurable influences

80

. Extensions should benefit from brands associated with high quality.

In addition to the aforementioned direct influences there are also indirect relationships between the success factors influencing extension success

81

. These relationships have to be taken into account as the relative importance of the success factors shift, when indirect effects are considered. For example, the relative importance of marketing communications rises from 9.4% when only referring to direct impacts to 22.5% when considering direct as well as indirect impacts

82

. Therefore only considering direct effects raises the risk of over- or underestimating the relative importance of single drivers which could negatively affect brand extension success, causing significant financial losses as well as harming brand equity

83

. The extent of indirect effects is described in the graphic below.

Though the impact of the success factors is fundamentally the same across different product segments of non-durable consumer goods, the influence of single factors can vary from

76 Sattler (2000), p. 12.

77 Swaminathan, Fox, and Reddy (2001), pp. 1-3.

78

Swaminathan, Fox, and Reddy (2001), p. 3.

79

Zeithaml (1988).

80

Garvin (1984); and Aaker and Keller (1990), p. 29.

81 Völckner and Sattler (2006a).

82

Völckner and Sattler (2006a).

83





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segment to segment

84

. Furthermore the impact of a single factor varies across consumer segments

85

.

84

Sattler and Völckner (2007), pp. 10-12.

85





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6. Conclusions

The decision for or against conducting a brand extension strategy is a very complex one as many parameters influence its success. Chances and risks have to be evaluated for every single case, especially as failure rates are high

86

and failures are expensive. To blindly trust an extension strategy for every new product launch was very inappropriate and irresponsible

87

.

When dealing with all the findings it has to be considered that most research on brand extension is based on hypothetical transfer products, implying that evaluations of extensions are largely not based on real experience rather than on hypothetical descriptions.

Furthermore the samples of the majority of studies consisted of students, but not a broad representative consumer base.

Both issues might limit the quality of research findings. However, Völckner and Sattler

88

find no evidence for biased results due to hypothetical extensions and additionally state that essential findings with students also apply to non-students.

Nevertheless, future research with more representative samples is acquired to test previous findings regarding brand extensions. Additionally, replication studies, which are popular in natural sciences, are also advisable in the business area to test if previous findings are generalizable. This is particularly true as several replications of a study by Aker

89

result in different findings. Furthermore, so far research on brand extension mainly dealt with nondurable consumer goods. But as brand transfer strategies are also popular with durable i products as well as services, future research should also investigate to what extent previous results apply to these segments

90

.

86

Ernst&Young/Nielsen (1999).

87

Sattler (2000), p. 17.

88 Völckner and Sattler (2006b).

89

Aaker and Keller (1990); compare explanations above.

90





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i

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WHAT ARE THE CHANCES AND RISKS OF BRAND EXTENSIONS

Table of Contents

1. Introduction and broader context

2. Definition, basic assumptions and relevance

3. Why brand extension can be an adequate strategy: chances

4. Why brand extension is not always the appropriate way: inherent risks

5. Crucial success factors

6. Conclusions

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WHAT ARE THE CHANCES AND RISKS OF BRAND EXTENSIONS

Table of Contents

1. Introduction and broader context

2. Definition, basic assumptions and relevance

3. Why brand extension can be an adequate strategy: chances

4. Why brand extension is not always the appropriate way: inherent risks

5. Crucial success factors

6. Conclusions

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