The Brand: A source of value for the consumer
Although we are primarily dealing with brands and their optimization, it is important to clarify that brands do not necessarily exist in all markets. Even if brands exist in the legal sense they do not always play a role in the buying decision process of consumers. Other factors may be more important.
For example, research on ‘brand sensitivity’ shows that in several product categories, buyers do not look at the brand when they are making their choice. Who is concerned about the brand when they are making their choice? Who is concerned about the brand when they are buying a writing pad, a rubber; felt tip pens, markers or photocopy paper? Neither private individuals nor companies. There are no strong brands in such markets as sugar and socks. In Germany there is no national brand of flour. Even the beer brands are mostly regional.
Inherently, brands exist as soon as there is perceived risk. Once the risk perceived by the buyer disappears, the brand has no longer any benefit. It is only a name on a product, and it ceases to be reference mark, a guide or a source of added value. The perceived risk is greater once the unit price is higher or the repercussions of a bad choice are more severe. Thus the purchase of long lasting goods is a long term commitment. On top of this, because humans are social animals, we judge ourselves on certain choices that we make and this explains why a large part of our social identity is built around the logos and the brands that we wear. As far as food is concerned, there is a certain amount of intrinsic risk involved whenever we ingest something and allow it to enter our bodies. The brand’s function is to overcome this danger which explains the importance of brands in the market for, for example, spirits such as vodka and gin.
The Brand: A source of value to the company
Why do financial analysts prefer companies with strong brands? Because they are less risky. Therefore, the brand works in the same way for the financial analyst as for the consumer, the brand removes the risk. The certainty, the guarantee and the removal of the risk are included in the price. By paying a high price for a company with brands the financial analyst is acquiring near certain future cash flows.
If the brand is strong it benefits from a high degree of loyalty and thus from stability of future sales. At Volvic, 10% of the buyers of this brand of mineral water are regular and loyal and represent 50% of the sales. The reputation of the brand is a source of demand and lasting attractiveness, the image of superior quality and added values justifies a premium price. A dominant brand is an entry barrier to competitors because it acts as a reference in its category. If it is a prestigious or a trendsetter in terms of style it can generate substantial royalties by granting licenses, for example, Naf-Naf earned over six million pounds in net royalties in 1993.
Investment in production, productivity and R&D. Thanks to these, the company can acquire specific know-how, a knack which cannot be imitated and which in accounting terms is also an intangible asset. Sometimes the company temporarily monopolizes the product by registering a patent. This is the basis of marketing in the pharmaceutical industry but also companies like Ferrero, whose products are not easily imitated despite their success.