#35 Branding, 5th of the 7 Powers
This is the fifth post on a series that summarizes the book 7 Powers by Hamilton Helmer.
This post discusses the fifth possible source of power for a business - branding.
Branding - The durable attribution of higher value to an objectively identical offering that arises from historical information about the seller. Branding is an asset that communicates information and evokes positive emotions in the customer, leading to a higher willingness to pay for the product. Branding is a non-exclusive
Why does switching costs result in Power?
Benefit: A brand can charge higher prices for it's product due to one or both of these reasons:
Affective valence: brand is able to evoke positive emotions through association that is distinct from the objective value of the good. Example: Coke has become synonymous with happiness and sharing
Uncertainty reduction: brand is able to provide "peace of mind" - knowing that the product will work as expected. Example: When you need to buy a product that you don't know how to evaluate and are unwilling to do the necessary research, you go with a product from a trusted brand.
Barrier: The reinforcing actions to strengthen a brand serves as a barrier as well. Efforts to mimic another brand run the risk of trademark infringement actions and associated costs
Only certain types of goods have branding potential as they must clear two conditions:
Magnitude: the promise of eventually justifying a significant price premium
Consumer goods associated with a sense of identity tend to have the purchasing decision more driven by affective valence
For branding power derived from uncertainty reduction, the customer's higher willingness to pay is driven by high perceived costs of uncertainty relative to the cost of the good.
Duration: a long enough amount of time to achieve such magnitude.
Challenges related to branding as a Power:
Brand Dilution: Releasing products that deviate or damage the brand image
Counterfeiting: Counterfeiters who may flood the market with inconsistent offering
Changing consumer preferences: Customer preferences may vary in a way that undermines the value of branding
Geographic boundaries: Affective valence may apply in one region but not another
The power intensity determinants for branding:
Industry Economics: Time constant and potential magnitude of branding effect
Competitive Position: Duration of brand investing