Brand Extension Strategy: Advantages and Disadvantages

Introduction to Brand Extension

Brand extension — the practice of using an established brand name to enter a new product category — has been shown to be hugely beneficial to many organizations (Tauber, 1988). Keller (2003) defined brand extension as occurring whenever a firm employs an established brand name in the introduction of an entirely new product. This strategy is employed in order to leverage and increase brand equity (Pitta and Katsanis, 1995). It is often regarded as beneficial because it reduces the costs of market research and advertising at introduction while increasing the likelihood of success, owing to the higher consumer preference derived from existing brand equity (Chen and Liu, 2004).

Keller (1993) points out that all studies on successful brand extension are based on the assumption that a brand is a collection of associations, and that the parent brand's associations can successfully influence consumer reactions to a given extension (Bhat & Reddy, 2001). The antecedents of a successful brand extension include the parent brand effect and the parent brand itself. Despite these advantages, Taylor (2004) indicated that one in two brand extension initiatives often fail. Some critics denounce brand extension vigorously, arguing that it causes companies to lose focus and confuses their customers. Other experts, however, maintain that brand extension is critical to a company's growth strategy. This paper presents these conflicting views and then selects the position that best serves the interests of shareholders while keeping customers both pleased and satisfied.

Advantages of Brand Extension

The brand extension strategy is popular because it is less risky and less costly than creating an entirely new brand (Taylor, 2004, p. 1). De Chernatony and McDonald (1998, p. 135) noted a similar economic advantage, pointing out that the economics involved in establishing an entirely new brand continuously push firms toward stretching their existing brand names into new markets. The main motivation for adopting brand extension strategies is the high cost of research and development coupled with the high rate of failure among new brands.

Taylor (2004) identifies several specific advantages of brand extension over new brand creation:

A strong brand can be used to promote a totally new product without the need to build imagery and awareness from scratch. Because the association with the core brand is already established, the remaining task is simply to communicate the specific benefits of the new innovation (Taylor, 2004, p. 1).

Well-established brands are regarded by consumers as a promise of high quality and enhanced utility. An extension therefore benefits from the parent brand's reputation in creating a compelling value proposition in the newly targeted market segment (Taylor, 2004, p. 1). The 2003 Brandgym survey found that 53% of consumers in the United Kingdom were more inclined to try a new product associated with a brand they already knew, compared with only 3% who would try a completely new brand with no existing association (Taylor, 2004, p. 1).

Viot (2007, p. 42) supported this view, noting that consumers expect to transfer information they hold about a brand to its extensions. If general opinion of a brand is favorable, consumer behavior toward a particular extension will tend to be positive. Successful brand extension can then result in brand loyalty, since a consumer satisfied with an extension is more willing to repurchase within the brand family. Purchase intention is thereby created — for instance, a Caterpillar equipment customer is likely to also buy the brand's footwear.

Compared with launching an entirely new brand, brand extension is generally less costly because the new product carries a name that is already known to consumers. Taylor (2004, p. 4) notes that studies indicate the cost per unit trial is 36% lower, while the repurchase rate is generally higher under a brand extension strategy. Smith and Park (1992, p. 296) confirmed this, suggesting that the advertising budget required to achieve a given market share is smaller for brand extensions than for new brands.

When a brand appears in an additional product category, it can be a more efficient method of brand building than spending money on intensive advertising campaigns. Furthermore, the relationship between a brand and its customers in terms of loyalty is likely to be strengthened (Aaker, 2004, p. 194).

If a brand image has weakened, brand extension can give it new life by increasing the frequency of brand associations with quality, a broad product range, and innovation. Consumers encounter the brand name more often, reinforcing the perception that it is a strong one. Viot (2007) stated that a brand's presence across multiple products improves its popularity and increases the chances of consumers encountering it — both in communications and on supermarket shelves — which in turn enhances brand memorization.

Brand extension can effectively prevent competitors from acquiring or exploiting a sizeable foothold in a given market, and can therefore prove worthwhile as a growth strategy (Aaker, 2004).

Zeithaml (1988, p. 20) defined perceived quality as a consumer's overall judgment of the degree to which a product is good or bad — an abstraction that sits above specific product attributes. Aaker and Keller (1990, p. 29) postulated that brands with strong quality associations are extremely well positioned for extension. However, if a brand is closely associated with inferior quality, extension is likely to cause more harm than good.

Dacin and Smith (1994, p. 232) found that the consistency of perceived quality across the products affiliated with a core brand can significantly influence the success of brand extension. The higher and more consistent the perceived quality evaluation, the greater the acceptance of the extension — meaning that high perceived quality generates consumer confidence in the extended brand.

Conclusion

The concept of brand extension is advantageous for already established brands. This is, however, true only if proper care is taken to prevent the spillover of its demerits into the actual implementation and operation of the strategy. After all, engaging in business has consistently been shown to involve the acceptance of risk.

References

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