In any organization, the opportunities for growth depend on how management defines what business they in.
Whether your goal is finding a new product, diversifying into a new growth category or protecting the current business from industry outsiders who might brand extend into your category, understanding how brand extension works should be something every marketing and senior executive should know. Brand extension is an alternative to merger or acquisition as a way to enter a new (for the company) category. When the choice is a growth category, the brand can be leveraged to generate an entirely new and profitable business with long term potential. This can be done by manufacturing and selling products or by licensing.
Brand Extension provides a means to diversify into new categories other than through expensive mergers and acquisitions. It offers an innovative way to develop new products. It allows some firms to turn what was a single product or service into a broad line of products in a variety of categories.
There are two strategic purposes to extend brands:
Create a new product: One objective is to stretch a brand into a different category in order to launch a new product that can provide incremental revenue. Creating new brands is expensive so brand extension can be a way to capitalize efficiently on the existing awareness and associations of existing brand names. Examples are Snickers Ice Cream Bars and Gerber Good Start Infant Formula, both conceptualized by me.
Create a new business: The second objective for extending a brand is to provide a means to enter a new category other than by merger or acquisition. Brands are often the major barrier to entry but they can also be the means to entry. Finding new growth categories to launch brand extensions can radically change a company by allowing the company to become a major player in a different category than they are in now. Examples are the line of Clorox cleaning and disinfecting products and the line of Buitoni refrigerated pastas and sauces, also conceptualized by me.
Reasons to Extend Your Brand
Growth – Companies that are looking for growth may turn to brand extension. There may be no growth potential in their current categories, especially if the company already has a dominant share of market or if their current category growth is flat to declining. Exploring other categories which are growing rapidly offer more potential.
Diversification– This is an important issue for companies as they strive to become less dependent on only one category. New products are the life blood of many companies. They provide the opportunity for growth and an increase in margins and overall profitability. They offer a way for a company to expand when the mature categories they are in no longer have growth potential. Over time, competitors copy existing products in a category no longer allowing any product to be distinctive.
In effect, the products become commoditized. Breaking out of this situation often requires innovation or moving into a new category. However, the cost of introducing new brand names in a new category can be prohibitive. The cost savings and efficiencies of using an existing brand, when possible, make brand extension appealing. Existing brands already have the paid-for awareness, reputation and strengths from associations that provide a new product with advantages that a new brand name does not have.
Excess capacity– When a company has excess capacity, they are motivated to develop new items that can utilize that capacity. There may be no additional line extensions they can use that will take advantage of that capacity or sell enough to make it worthwhile.
Efficiency– Entering new categories with a brand extension can often utilize the company’s existing resources such as manufacturing, distribution, sales or marketing. Even though it is a new category for the company, these advantages can offer competitive cost advantages versus players already in the new category.
Economies of Scale– Expanded businesses often benefit from the increased size of their business. Entering new categories, especially large ones, offer a company the opportunity to benefit in ways unavailable previously. For example, they might now be able to afford a larger plant, attract a more successful distributor, and interest a major advertising agency. In effect, there are not only quantitative cost efficiencies, but qualitative advantages as well.
Profit margins– Low or declining profit margins of the existing business is another reason for extending a brand into a new category. A number of my clients were in commodity businesses. Commodity products by their nature are largely identical to what every competitor is selling. Because of the competitive nature of commodity categories, there was a constant squeeze on profits. The client wanted to offer value- added products that commanded price premiums because of their point-of-difference.