How important is exclusivity to premium brands?
This question has a multitude of applications - For example, Is creating a low cost car (The A-class) detrimental to the Mercedes brand? Does a business school, say Wharton or Kellogg, dilute its brand by having many more students on its rolls (via executive MBA programs) than a peer school that grants full-time MBAs only (say HBS or Stanford) ? Does the availability of Paul Mitchell shampoo at the local pharmacy (the brand used to be sold through hair salons) make it a mass market brand?
A brand is associated with a set of values or emotions - lets begin with that definition. Logically then, the next question is - is exclusivity a value intentionally associated with a brand? Yes, for the examples above - a car, a business school and a shampoo - as well as others. Does then a reduction in exclusivity reduce the premium of the brand? Premium is the additional willingness to pay for an item beyond its functional value. I would argue that premium is proportional to exclusivity, and therefore as exclusivity reduces, the willingness to pay approaches the functional value of the product or service in question.
I have not researched this question extensively, and must also point out that there may be more pressing goals for a firm than maintaining premium. Consider BMW, which has a strong, sporty brand image, is now going to enter the market for minivans. In this example, the need for growth (revenue, profit etc.) is better served by capturing the market of not-so-young folks (likely with kids) that are about to 'graduate' from an M3 to a minivan made by another vendor than by keeping the same level of willingness to pay on the M3. Hence, in terms of shareholder value (and some excel model floating at BMW), this is the right choice to make.
Thoughts?
This question has a multitude of applications - For example, Is creating a low cost car (The A-class) detrimental to the Mercedes brand? Does a business school, say Wharton or Kellogg, dilute its brand by having many more students on its rolls (via executive MBA programs) than a peer school that grants full-time MBAs only (say HBS or Stanford) ? Does the availability of Paul Mitchell shampoo at the local pharmacy (the brand used to be sold through hair salons) make it a mass market brand?
A brand is associated with a set of values or emotions - lets begin with that definition. Logically then, the next question is - is exclusivity a value intentionally associated with a brand? Yes, for the examples above - a car, a business school and a shampoo - as well as others. Does then a reduction in exclusivity reduce the premium of the brand? Premium is the additional willingness to pay for an item beyond its functional value. I would argue that premium is proportional to exclusivity, and therefore as exclusivity reduces, the willingness to pay approaches the functional value of the product or service in question.
I have not researched this question extensively, and must also point out that there may be more pressing goals for a firm than maintaining premium. Consider BMW, which has a strong, sporty brand image, is now going to enter the market for minivans. In this example, the need for growth (revenue, profit etc.) is better served by capturing the market of not-so-young folks (likely with kids) that are about to 'graduate' from an M3 to a minivan made by another vendor than by keeping the same level of willingness to pay on the M3. Hence, in terms of shareholder value (and some excel model floating at BMW), this is the right choice to make.
Thoughts?
posted by Mukul Chawla at 12:26 AM
2 Comments:
If you believe the holy grail of western management education that corporations exist to maximize shareholders wealth and you assume that volume/ non-exclusivity (leading to agnostic channel strategy etc.)is inversely proportional to brand premium (gross margin being a quantitative representative of that), then it becomes a mathematical optimization problem for the corporations - at what point do u trade-off between contribution margins (exclusivity) and volumes (non-exclusivity) to maximize shareholder wealth (I guess, a multiple of EBITDA can be a fair approximation of shareholder wealth)? Of course, this question in vaccum doesn't make sense since there are other variables involved - financial contraints, organizational capability to scale etc. I think, there should be a way to solve this question mathematically/statistically.
Okay, there seem to be two questions intertwined here: a) What is the relationship between brand premium and exclusivity, and b) What is the optimal level of exclusivity?
The answer to the former does provide one (possibly) crucial input to the latter, in the sense that it allows a firm to model, either in a precise quantitative manner or otherwise, the trade-off between the two factors in terms of sales: How much does a brand that 'goes mainstream' lose by way of loyal customers, for whom the exclusivity was an important factor in their dcision making process? Can't think of examples offhand where the loss of exclusivity was a failed gamble. Could you come up with anything?
As for the relationship between premium and exclusivity itself, a couple of things seem to me to make it a little more complicated than a simple inverse relationship.
One is, in some cases, the presence of some technology (or some features) that puts a product into a premium segment. The product's functional value itself may be higher; however, in the context of the broad function that it performs, it may be viewed as a premium brand vis-a-vis the other products that perform the same function. In such a case, I don't know if your definition of a premium brand still holds. So it's probably a question of the level of abstraction.
The other is cause and effect. Some products are marketed through limited channels initially to create an effect of exclusivity, and therefore an image of being a premium brand. Then, once the product has found its feet in the market on its own merit, so to speak, the exclusivity reduces, without necessarily losing the brand image.
Thoughts?
Post a Comment
<< Home