These are the important criteria for a brand extension to succeed:
Strategic Business Decision – Management must recognize that launching a brand extension is a strategic business decision because the company is entering a new category.
Top Management Commitment – Top management commitment over time is necessary for long run success.
Category Size and Structure – Entering a large category is critical to success because a brand extension that achieves a small brand share can still represent a large business.
Fit – Prospective consumers in the parent and new category must believe the new brand extension is a logical fit with the brand name.
Leverage – The brand name must bring one or more elements that give it a competitive advantage against existing competitors in the new category.
A Brand Plan – Long term success requires that management develop a plan for how to get the first product established and what extensions to launch in the future.
Strategic Business Decision: A company considering an acquisition of another company in a different category or industry would conduct considerable analysis before proceeding. They would examine the market structure of the new category identifying strengths and weaknesses and market shares of competitors. They would study the manufacturing, distribution, cost analysis and profitability of the new business. They would project future potential and expected revenue streams. This would be just the beginning of the depth of analysis required to buy a company in a different category.
Brand extension is the decision to enter a new category. It is not just another new product in the same business such as a line extension. Therefore, before launching a brand extension, a thorough business analysis is necessary. Simply conducting a market research study to determine what consumers might accept from an existing brand name is necessary but totally insufficient to proceed. Brand extensions do change the meanings and associations consumers have with a brand. This, likewise, has to be considered so as not to “accidently” alter consumer perceptions in a negative way.
Top management commitment: Making the decision to enter a new business should require a total commitment by top management for the long run. It will take some time to establish the brand extension. Management has to be prepared for the investment and likely short-term losses that can occur. Competitors will not be oblivious to the launch and will likely respond by possibly copying features or claims, increasing promotion and the like to protect their share of market. Brand extensions are a threat to the existing competitors, especially if the company launching the brand extension is a major firm with deep pockets.
Another aspect of extending a brand into a new category is for management to understand that the new product is a stepping stone into the new category, not the end in itself. There should be a commitment to introduce additional items – either line extensions or other brand extensions so the first item does not remain an orphan.
Category Size: A criteria often ignored when evaluating brand extension is category size. In my opinion, this is one of the most important considerations. The reason is that when a new brand extension is introduced into a mature existing category, it is likely to get a small share of market. This is because of order-entry. Models of brand share reveal that the innovator of the category generally will retain the dominant share, sometimes after many copycat products enter. As more competitors enter with their own brand, the laggards get a decreasing share of market unless there is some major improvement in their products.
Most brand extensions are laggards – they enter long after the category is established and brand leaders dominate. This sounds like a recommendation never to brand extend since a small share will result. For small categories, this is the point. A small share of a small category is going to be a small business. A small share of a very large category can be profitable.
Apple is a company that understands this principle very well. Starting off in computers, a small industry at the time, Apple helped build the category though never dominating because of the success of the PC. Following that, however, Apple extended their brand into walk-around music players then dominated by Sony. The Apple iPhone, iPad and Watch were entries in the existing smartphone, tablet and watch categories. Apple did not create nor dominate in any of these. In 2018, the iPhone has 15.6% share of all smartphones sold worldwide and the iPad has 26.6% of the tablet market. Yet because these markets are so large, the brand extensions of Apple are highly profitable.
Category structure: Category structure is another consideration when deciding about extending a brand. Fragmented categories where there are no dominant brands or where there are many equal brands are appealing. In contrast, a market dominated by a few players is hard to penetrate unless the brand extension has unique and motivating features that can attract a sizable segment. For example, shampoo and deodorant are two categories that have many brands and types where no brand dominates. In contrast, the cola beverage market is dominated by a few highly advertised nationally known brands. Attempts to get a significant cola success against these giants is next to impossible.
Fit: To avoid creating confusion and to enhance the chance of success, a brand extension should be accepted by consumers as a logical fit. Nike Carrots, Microsoft Shoe Shine Kits, McDonald’s Office Furniture and Walt Disney Cigarettes do not sound right because they are not a logical fit with the brand name. Consumers would not expect such products from these brands and might be incredulous or even horrified if such items appeared in the marketplace. In contrast, Nike Baseballs, Microsoft Medical Software, McDonald’s Frozen French Fries in supermarkets, and Walt Disney Kids TV Channel would appear logical and might be accepted by consumers.
It is important to recognize that for many brand extensions, the customer base is different from the one buying the parent brand. Muscle Milk was a dominant seller of beverage mix to bodybuilders. When a liquid version of Muscle Milk entered supermarkets, it was targeted to active individuals and those needing added protein in their diet, not the professional bodybuilder. Therefore, what the brand meant to the new prospective customer was more relevant than what it meant to the parent product targeting bodybuilders. Even if the new customer base had never heard of Muscle Milk, they would certainly have impressions about its benefits and features by simply hearing the brand name.
Leverage: Brand names may be accepted by consumers to fit into a new category, but it is even more important that they possess leverage. Leverage is a competitive advantage the brand extension possesses against competitors in the new category. Coffee creamers are dominated by Coffemate and other brands that have been in the market for years. Flavored varieties of the major brands have been popular. Bailey’s Irish Cream liqueur was extended into the coffee creamer market. Consumers may have never thought of such an extension and may not have even thought it was very logical moving from an alcoholic category to a non-alcoholic one. Yet the leverage the company saw was the distinctive flavor of Baileys and its creamy consistency. This point of difference was brought to the new category by the brand name itself. Obviously, the product would have to deliver to be a success. Once the coffee creamer was accepted, Baileys launched alcoholic iced coffee which would no longer be seen as a stretch. Since people were already adding Baileys liqueur to coffee, this extension would be a natural.
The way to determine if a brand has leverage is to conduct consumer research among prospects (e.g. existing users of coffee creamer) and ask whether they can think of any advantages that a Baileys Coffee Creamer would have over other coffee creamers. Once they are given the concept, respondents should be able to articulate what Baileys “owns” that can be transferred to the new category and whether the new product would be desired (willingness to try and interest in using if satisfactory).
Baileys is an example illustrating that if a brand name has leverage in a new category, it may succeed even if it seems strange, unexpected or even a bit illogical. In contrast, many brand extension concepts may seem logical and yet have no leverage and therefore are unlikely to be successful.
There is an inverse relationship of fit and leverage. Unfortunately, many people who have studied and written about brand extension make the mistake of assuming that ‘fit’ is the important issue in choosing a brand extension rather than ‘leverage’. In fact, there is somewhat of an inverse relationship between fit and leverage. Brand names that have been used on many categories generally have little leverage except for being well-known. Being well-known is not sufficient for brand extension; otherwise, it would be easy to extend brands since there are thousands of brands that are well-known. Brands that are closely related to a product, service, benefit, attribute, feature, etc. can use that to provide leverage to obtain a competitive advantage. For example, Philadelphia is “the” brand of cream cheese. If cream cheese is important to another category, Philadelphia will be a good brand for it. Cheesecake is such a category.
Brand Plan: A brand plan requires deciding prior to any extension what product will be introduced first and what additional products will eventually be launched into the line. This acknowledges that the original product should not remain an orphan. Brand extensions change consumer perceptions and thereby allow new items to be brought to market that would previously be thought to be too much of a stretch (not fit). Shown in the Baileys example, it is important to think through the possible extensions that could be successful over time. If no additional products can be conceived to sell into the new category but one, maybe that brand extension is not a good idea. It is impossible to achieve scale economies and advertising clout with a one-product line. Unfortunately, many brand extensions are one item introduced into a small category. That is part of the reason brand extension has a bad reputation with some marketers because they see how many of them fail or just linger with low sales. In a later chapter, there will be a discussion about how to develop a brand plan.