Flipkart’s losses were in multi-million dollars, but Walmart acquired 77 percent of shares in Flipkart for $16 billion. There are many other e-commerce companies in India that could have been acquired at much lower price, but Walmart chose an expensive option. As another example, in a supermarket, many chocolate brands are available at low price, but customers pay a higher price for Ferrero Rocher chocolate.
In the first example, Walmart didn’t just buy an e-commerce company in India, they bought Flipkart-–a brand. Just because a company is making losses, doesn’t mean that its brand is not valuable. Brand has the power to drive profits in the future. In the second example, customers don’t buy just chocolate, they buy Ferrero Rocher--a brand. Brands earn psychological goodwill in the mind of their consumers through their products, communication, distribution channel, employees and other factors. Perception effects of using a brand goes far beyond just consuming a product and over time, the reputation of the brand name drives the price.
Let’s have a look at a few of the value additions that brand provides to a business:
It is also important to understand in which categories brands make a difference and where they don’t. As the factors like risk and prestige of using a category goes down, the significance of having a brand also reduces.
For example, professional services such as consulting have high perceived risks and external factors don’t say much about the inner qualities. So, customers look up to brands such as McKinsey, which have created strong perceptions about quality and thought leadership. Similarly, in categories like cosmetics and makeup, brands like L'Oréal Paris are able to charge a premium. In low risk and low involvement categories such as toilet paper, aluminium foil, match boxes, floor cleaners and so on, a brand is just a recognition symbol.
In high involvement categories, to command a premium, it is important for brands to provide a superior product. High-end brands give differential advantage to their products by investing in creativity, innovation, quality, R&D, advertisement and so on. On the other hand, brands in low-involvement categories try to give differential advantage by reducing costs and improving productivity. In low involvement categories, hard discounters can win over their costlier competitors.
Marketing guru Seth Godin has said that a brand is the set of expectations, memories, stories and relationships which, taken together, account for a consumer's decision to choose one product or service over another. When thinking about creating brands, companies have to realise that building brands is not just the responsibility of marketing departments or advertising agencies. Brands are built by everything a company does.
The writer is author of the book 'Booming Brands'. (Views expressed are personal and don't necessarily represent any company's opinions)
The thoughts and opinions shared here are of the author.
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