There are significant BENEFITS to a successful brand extension:
Creation – Create a new product or a new business.
Growth – New categories may offer more growth potential than the categories the business is in now
Diversification – Companies can lower their risk by being in multiple categories. Brand extension is an alternative to merger and acquisition.
Excess capacity – When there is excess capacity, entering a new category with a brand extension may utilize this capacity to may make a significant contribution to overhead.
Efficiency – Entering a new category with a brand extension utilizes a businesses’ manufacturing, distribution, sales or marketing assets that affords efficiency.
Economies of Scale – Entering a new category gives a company the potential to achieve greater scale due to size.
Profit margins – New categories may offer the potential for launching differentiated value-added products that have higher profit margins than current offerings.
“Brands are the barrier to entry into new categories; they are also the means to entry.” Brands (not production capabilities) are the prime barrier to entry into most categories. Many companies could make a cola, but only Coca-Cola owns that brand. As a result, well known existing brand names can be the way for a company to enter a new category that otherwise would be impossible. Our brand extension study for Reese’s identified peanut butter as a logical brand extension. Hershey could not have efficiently entered the peanut butter category without the Reese’s brand. In effect, brand extensions allow a company to capitalize on the “previously paid for” recognition, reputation and leverageable equity of its brand names. With the prohibitive cost of establishing new brands (just ask ex dot-coms), brand extensions save companies money. When done correctly, they also reinforce the properties of the existing parent product through synergy and bring news to the brand. It is not uncommon to find sales of the parent product rising after the launch of a successful brand extension.
Benefits of Brand Extension can be seen with this example. Note how the Olay brand (originally Oil of Olay) entered the soap business:
Benefits and Risks of Changing Consumer Perceptions
Much has been written as scare tactics about the negatives and risks of brand extension. In reality, if a brand extension is so off target or lacks fit and or leverage, it likely will fail and do little damage. Most of these misfires die in limited test market anyway.
Note how Cuisinart which was a food processor has extended their line into a variety of product categories.
As noted, the opportunities available to a company depend on how they define their business and Cuisinart made a conscious decision to extend the brand. The downside risk is that Cuisinart food processors share of market might decline but the vast increase in sales and profits from the brand extensions meant the trade-off was worth it.