This is a re-post from the archives of Smarter Markets.
The original article appeared in July of 2008.
On this blog we spend a lot of time discussing branding. We talk about brand strategy, market positioning, etc. To many, especially small business owners, the concept of branding may seem like an expensive marketing “gimmick” that some businesses might not have the time or resources to invest in.
In a previous blog I discussed the differences between Luxury Brands and Commodity Brands. Commodity Brands are those brands which buyers compare and purchase based purely on price (Walmart). Consumers of Luxury brands on the other hand, make their purchasing decisions based on something else. The rationality of purchasing Luxury Brands could be differences (real or perceived) in quality, style, fashion, service, warranty, etc. Using Walmart as an example of a Commodity Brand, a good Luxury Brand comparison would be Nordstrom or Macy’s.
In business school one of the fundamentals of brand and pricing we learned was the impact that brand has on profitability. Commodity Brands follow what I consider a more traditional management mindset in which profit is dependent on how lean a company’s operations are. For every 1% improvement (reduction) in cost, these firms enjoy a 2.5% improvement in operating profit.
Compare this to management principles of Luxury Brands: For every 1% improvement (increase) in price, these firms enjoy over 7% improvement in operating profit!
What’s the big deal about Brand? Brand is a powerful driver of price. Commodity Brand pricing faces downward pressure by competitors. Luxury Brand pricing, while kept in relative check by competitors (when there is competition), can enjoy the benefits of not being trapped by the destructive cycle of price wars with competitors. When Branding is done right, price actually signifies the prestige of the Brand.
Only brand can justify sustained improvement in price. Considering the increase in profit, can your firm afford not to invest in a brand strategy?
