In many industries, it has become routine for companies to spend vast sums on advertising and marketing their brands. But with copious product information now available to consumers through digital channels, it’s worth challenging the routine. Should you spend your next dollar on making your brand promise through advertising or other marketing tactics, or on keeping your brand promise by ensuring that your products and company deliver what customers want? It doesn’t pay to invest in the brand if the business model is flawed or the product lacks customer appeal.
That’s because the ultimate point of a brand is not to create emotional appeal or to generate buzz. The point is to shift customer demand.
Well-managed brands shift demand in several ways: by commanding a higher price, generating more volume or some of both. Too high a price will dampen demand and reduce revenues, but the stronger a company’s brand, the further out it can push this intersection of volume and price in order to maximize revenues and profits.
Bain & Company’s analysis of 21 product categories quantifies the power of brands. In the MP3 player category, for instance, the leading player captured 2.9 times the market share of the second-ranked competitor as a function of its brand alone—holding price and other product features equal. Put another way, the leading brand was so strong that the company could double its price and still have a market share equivalent to the second brand. We found a similar dynamic in most other categories, even in business-to-business industries (see sidebar, “The science of calculating how much a brand can shift demand”).
The power of a brand to shift demand applies whether a company pursues a low-price or a premium-price strategy. At the low end, for instance, discount retailer and grocer Wal-Mart excels by constantly wringing out costs and passing on the savings to consumers, earning operating margins of 5.3% in its express stores and 3.1% in neighborhood stores in the process. At the other end of the strategy spectrum, US grocer Whole Foods earns most of its profits in prepared foods, where it commands a substantial price premium. Whole Foods recently generated operating margins of some 6.9%, five times the US grocery average. For both companies, the brand plays an essential role in moving the business toward the point of maximum revenues. Wal-Mart’s brand reinforces the company’s “great value” strategy to increase volume while Whole Foods’ brand—rooted in its sophisticated in-store presentation, knowledgeable staff and an emphasis on organic food—convinces customers to pay a higher price on prepared food (see Figure 1).