Brands are increasingly being recognized as an asset and their value is being included in company balance sheets. As with any asset you might decide to sell off or retire, it is vital that you have a systematic and strategic approach for pruning your brand portfolio and adding brand line extensions.
Interbrand conducts an annual brand value research study of the world’s top 100 brands. They assess brand values on a variety of factors such as strategic brand management, budget allocation, ROI, portfolio management, brand extensions, M&A, balance sheet recognition, licensing, transfer pricing and investor relations. The combined total value of the Top 100 now reflects two trillion dollars!
Are Your Brands Costing More than They’re Worth?
Taking the step to delete a brand is a serious management decision. While the profit payoff comes early, it can take a company 3-5 years
to recoup the revenue. Yet, it might be the very thing you need to do. Why? Just because you have a brand doesn’t mean you have value.
According to some research, most businesses earn almost all of their profits from a small number of brands. In a HBR article, Nirmalya Kumar, a professor a the London School of Business, wrote that many corporations generate 80% to 90% of their profits from fewer than 20% of the brands/products they sell, and lose money or barely break even on many of the other brands in their portfolio. He provided a couple of examples, including one for Unilever which in 1999 had 1600 brand in its portfolio, but more than 90% of its profits came from 400 brands with the remaining 1200 brands losing money.
Why aren’t these brands profitable? There are certain costs associated with each brand. These costs include the cost to:
- differentiate each brand/product within the market
- manufacture, produce, and service low volume brands
- have the brand in the channel
- manage the complexity of the portfolio (price lists, packaging, inventory, etc.).
To offset these costs, some companies attempt to “club” together several brands or switch from selling local brands to global or regional brands, were unable to maintain market share less than 50% of the time. Similarly, when firms merge two brands, the market share of the new brand stayed below the combined market share of the deleted brands.
Are Your Brand Line Extensions Adding Value to Your Portfolio?
You add even more complexity to the brand portfolio conversation when you mix in brand line extensions. More than half of all new products introduced each year are brand line extensions. When a company introduces a new product by using an established product’s brand name (Coca-Cola, Coca-Cola Light, and Coca-Cola Zero, for example), modifies the package, or adds or changes features in order to appeal to a new segment, they are creating a brand line extension. Companies extend a brand in order to reduce the risks associated with new product development.
For this approach to be successful, Brad VanAuken advises that “Any brand extension into a new product category must reinforce one of those primary associations without creating new negative, conflicting or confusing associations for the brand.”
When executed well, the brand extension will actually reinforce what your brand stands for.” When this association is strong, Nigel Hollis suggests that “the fit between the brand and the category does not need to be based on a direct application of the brand’s functional credentials”.
As you can see when properly implemented, brand extension serves as a strategy intended to increase and leverage brand equity. How? By creating a brand or line extension it may enable you to enter new product categories, new markets or market segments.
Selecting Your Metrics for Brand Extensions
What are some metrics for brand line extensions? Here are three marketing metrics to determine whether a brand line extension is adding value to your portfolio:
- Incremental increase in overall number of profitable customers. Has the extension enable you to acquire profitable customers you wouldn’t have otherwise attracted?
- Greater marketing efficiency, that is sales revenue/marketing costs (remember to include all marketing costs associated with the extension, including people)
- Lower promotional costs of product line extensions – Customers have instant recognition of the product / brand name.
The ultimate business measure of success for any line extension is whether the company experienced increased profits at the introduction and growth stages in the product line extensions life cycle.
Brand Portfolio Management: Should You Prune?
How do you know whether you have too many brands or band extensions? If you answer yes to 6 or more of these 10 questions it may be time to make brand/product rationalization a priority:
- Are more than 50% of our brands/products laggards or losers in their categories?
- Are we unable to match our competitors in marketing and advertising for many of our brands/products?
- Are we losing money on our small products/brands?
- Do we have different brands in different countries for essentially the same product?
- Do the target segments, product lines, pricing strategies, or distribution channels overlap to a great extent for any brands in our portfolio?
- Do our customers think our brands compete with each other?
- Are channel partners/resellers only selling/stocking a subset of our portfolio?
- Does an increase in advertising expenditure for one of brands/products decrease the sales of any of other brands/products?
- Do we spend an inordinate amount of time discussing resource allocations decisions across our brands/products?
- Do our brand/product managers see one another at their biggest rivals?
To answer some of these questions may require you to conduct customer or market research. When you answer yes to 6 or more of these questions it may be time to institute a systematic brand deletion process.
Two Pruning Approaches
There are two approaches for deleting brands: the portfolio approach and the segment approach. You may want to use elements of both in your process.
In the portfolio approach, only those brands that conform to certain parameters are kept. To take this approach you will need to set down strict selection criteria. General Electric’s approach that only those brands that are number one or two or both in their segments as measured by market share is an example of strict criteria. Consider creating at least three criteria: one based on current market share, one based on potential for growth, and one based on profitability. Then evaluate each brand against the selected criteria and retain only those that meet them.
In the segment approach, companies identify brands they need to satisfy key needs and wants within specific segments. This approach requires that you have a clear definition of your market segments and the key needs for each. The process is then to identify those brands that best meet each segments needs and to delete those that do not.
Once you identify the brands you want to delete, evaluate each brand and decide whether you are going to sell it, milk it, kill it, or merge it.
FAQ:
A: A vision sets the desired future state for your company, while a strategy provides the roadmap to achieve it. Without a strategy, even the most compelling vision remains unrealized. The business environment is constantly changing due to technological advances, demographic shifts, and market dynamics. Strategy ensures your company proactively navigates change, maintains productivity, and achieves profitability. Brands are increasingly recognized as assets, with their value included in company balance sheets. As with any asset you might sell off or retire, it is vital to have a systematic and strategic approach for pruning your brand portfolio and adding brand line extensions.
A: Deleting a brand is a significant management decision. While the profit payoff can come early, it may take 3-5 years to recoup lost revenue. Research shows most businesses earn nearly all profits from a small number of brands. For example, Unilever once had 1,600 brands, but over 90% of profits came from just 400, with the remainder losing money. Brands incur costs—differentiation, production, channel management, and portfolio complexity. If these costs outweigh returns, rationalization is necessary.
A: Brand line extensions—using established brand names for new products or segments—can reduce new product risk and leverage brand equity. However, extensions must reinforce core brand associations and avoid creating confusion. When executed well, extensions strengthen brand equity and facilitate entry into new categories or markets.
A: Consider these marketing metrics: incremental increase in the number of profitable customers attracted by the extension; greater marketing efficiency (sales revenue/marketing costs, including all extension-related costs); lower promotional costs due to instant brand recognition. The ultimate measure is increased profits during the introduction and growth stages of the extension’s life cycle.
A: If you answer “yes” to 6 or more of these 10 questions, it may be time for brand/product rationalization: Are more than 50% of your brands/products laggards or losers in their categories? Are you unable to match competitors in marketing and advertising for many brands/products? Are you losing money on small products/brands? Do you have different brands in different countries for essentially the same product? Do target segments, product lines, pricing strategies, or distribution channels overlap for any brands? Do customers think your brands compete with each other? Are channel partners/resellers only selling/stocking a subset of your portfolio? Does increased advertising for one brand decrease sales of others? Do you spend excessive time discussing resource allocation across brands? Do brand/product managers see each other as rivals? If you answer yes to 6 or more, a systematic brand deletion process is warranted.
A: Portfolio Approach: Retain only brands meeting strict criteria (e.g., market share, growth potential, profitability). General Electric’s rule—keep brands ranked #1 or #2 in their segment—is a classic example. Segment Approach: Identify brands needed to satisfy key needs within defined segments. Delete brands that do not meet those needs. Once brands for deletion are identified, decide whether to sell, milk, kill, or merge each brand.
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