MARKETING MANAGEMENT

LECTURE MATERIAL-LP11

Brand Extension - Meaning, Advantages and Disadvantages

Brand Extension is the use of an established brand name in new product categories. This
new category to which the brand is extended can be related or unrelated to the existing
product categories. A renowned/successful brand helps an organization to launch products
in new categories more easily. For instance, Nike’s brand core product is shoes. But it is
now extended to sunglasses, soccer balls, basketballs, and golf equipment. An existing
brand that gives rise to a brand extension is referred to as parent brand. If the customers of
the new business have values and aspirations synchronizing/matching those of the core
business, and if these values and aspirations are embodied in the brand, it is likely to be
accepted by customers in the new business.

Extending a brand outside its core product category can be beneficial in a sense that it
helps evaluating product category opportunities, identifies resource requirements, lowers
risk, and measures brand’s relevance and appeal.

Brand extension may be successful or unsuccessful.

Instances where brand extension has been a success are-

• Wipro which was originally into computers has extended into shampoo, powder, and
soap.

• Mars is no longer a famous bar only, but an ice-cream, chocolate drink and a slab of
chocolate.

Instances where brand extension has been a failure are-

• In case of new Coke, Coca Cola has forgotten what the core brand was meant to
stand for. It thought that taste was the only factor that consumer cared about. It was
wrong. The time and money spent on research on new Coca Cola could not evaluate
 the deep emotional attachment to the original Coca- Cola.
• Rasna Ltd. - Is among the famous soft drink companies in India. But when it tried to
move away from its niche, it hasn’t had much success. When it experimented with
fizzy fruit drink “Oranjolt”, the brand bombed even before it could take off. Oranjolt
was a fruit drink in which carbonates were used as preservative. It didn’t work out
because it was out of synchronization with retail practices. Oranjolt need to be
refrigerated and it also faced quality problems. It has a shelf life of three-four weeks,
while other soft- drinks assured life of five months.

ADVANTAGES OF BRAND EXTENSION

Brand Extension has following advantages:

• It makes acceptance of new product easy.

• It increases brand image.

• The risk perceived by the customers reduces.

• The likelihood of gaining distribution and trial increases. An established brand name
increases consumer interest and willingness to try new product having the established
brand name.

• The efficiency of promotional expenditure increases. Advertising, selling and

promotional costs are reduced. There are economies of scale as advertising for core
brand and its extension reinforces each other.

• Cost of developing new brand is saved.

• Consumers can now seek for a variety.

• There are packaging and labeling efficiencies.

• The expense of introductory and follow up marketing programs is reduced.

• There are feedback benefits to the parent brand and the organization.

• The image of parent brand is enhanced.

 • It revives the brand.

• It allows subsequent extension.

• Brand meaning is clarified.

• It increases market coverage as it brings new customers into brand franchise.

• Customers associate original/core brand to new product, hence they also have quality
associations.

DISADVANTAGES OF BRAND EXTENSION

• Brand extension in unrelated markets may lead to loss of reliability if a brand name
is extended too far. An organization must research the product categories in which
the established brand name will work.

• There is a risk that the new product may generate implications that damage the image
of the core/original brand.

• There are chances of less awareness and trial because the management may not
provide enough investment for the introduction of new product assuming that the
spin-off effects from the original brand name will compensate.

• If the brand extensions have no advantage over competitive brands in the new
category, then it will fail.

LINE EXTENSION

A product line extension strategy is an approach to developing new products for your
existing customers or for prospects who do not currently buy from you. Extending a
product line involves adding new features to existing products, rather than developing
completely new products. This can reduce the cost of product development as well as
increase opportunities to grow your revenue.
Compete More Effectively

To identify opportunities for product line extension, analyze your existing products
and compare them with competitive offerings. Your competitors may include different
features, a wider range of sizes or product variations aimed at different sectors of the market,
such as luxury or budget versions. Adding features that your competitors offer may enable
you to deal with prospects that you cannot currently supply with existing products. You may
also be able to increase your market share by matching competitors’ product specifications
but selling at a lower price.

Meet Changing Needs

A product line extension strategy ensures you can meet your customers’ changing
needs. They may require products in smaller or larger package sizes. They may need
different levels of product quality or performance to meet their own operational needs.
You may be able to take advantage of technological developments to offer the same type
of product with superior performance. Ask your sales representatives or contact
customers directly to find out if your current product range meets their needs and to
identify opportunities to extend your product line.

• Segment Your Market

Extending your product line can help your company enter new market sectors. An
engineering company, for example, may extend its range by adding features that are
specific to sectors such as the automotive or aerospace industries. In addition to offering
products that meet sector needs more closely, a product line extension strategy also helps
to position a company as a specialist supplier to each market sector.

• Maintain Customer Loyalty

Maintaining sales to existing customers is important to long-term revenue growth and
profitability. By extending your product line, you may be able to sell products that your
customers are currently sourcing from competitors. This helps to increase customer loyalty
and grow revenue per customer.
• Reduce Marketing Costs
Adding new products or services to your existing line can help to strengthen your brand
and reduce your marketing costs. By using the same packaging designs, logos and
advertising themes that feature on your existing products, you can ensure that customers
and prospects recognize the brand values of the new products without having to run major
advertising or marketing campaigns.

Advantages of a product line extension

• Established and loyal customer base

• Existing expertise
• Retailer relationships
• Low cost of production
• Low cost of development
• Provides market information
• Competitive barriers
• Easy to implement
• Possible economies of scale
• Supply relationships
• Meets variety needs of consumers

ESTABLISHED AND LOYAL CUSTOMER BASE

If the company provides another variation of an established brand, then they are leveraging
the existing loyalty and likeability of the brand. This means that immediate sales and profit
are far more likely, as well as increasing overall customer equity and customer lifetime
value.
EXISTING EXPERTISE
By concentrating on the range of products that they already produce and market a
company can be reassured that it has the existing expertise within the company to be
successful of a product line extension.

RETAILER RELATIONSHIPS

Remaining within the same product category and simply extending the product line, the
firm is likely to have established wholesaler and retailer distribution channels in place. This
means that the availability of the new product should be quite wide and achieved fairly
quickly and probably without the need for excessive trade promotions.

LOW COST OF PRODUCTION

As a company has existing expertise and processes in place for this category of product,
then it is likely that their production costs will be relatively low – as the new product will
be produced utilizing the existing systems of the company.

LOW COST OF DEVELOPMENT

Because the company has developed this category product before, there should be a
relatively low-cost development – primarily because they have the in-house expertise and
knowledge, along with the necessary IT/manufacturing capabilities.

PROVIDES MARKET INFORMATION

By having a range of similar products (within the same product category), the company
can various marketing mix offering for one of these brands/products at a time and is able
to generate valuable market information by utilizing the other brands/products as a control.
This allows the company to engage in more marketing experimentation and gain greater
customer insights.
COMPETITIVE BARRIERS

By having a broader range of products within the same product category, makes it more
difficult for competitors to find an obvious gap in the marketplace. It would also have the
impact of fragmenting the market and splitting segments into niches. This may have the
effect of making it non-viable for a competitor to bring a similar product to the market.
EASY TO IMPLEMENT

Having produced a marketed this type of product before, it is highly likely that the new
product development process and marketing launch will be quite simple the company to
implement. They should be able to do this easily with existing personnel and probably
without the need to outsource to consultants or other specialists.

POSSIBLE ECONOMIES OF SCALE

With a broader product range, and hopefully a greater level of sales volume, it may be
possible to achieve improved economies of scale – and create a lower cost structure and a
higher profit unit margin.

SUPPLY RELATIONSHIPS

Supplier relationships should be enhanced because the firm is likely to purchase more
materials from the existing suppliers because they are manufacturing and/or producing a
similar product or service.

MEETS VARIETY NEEDS OF CONSUMERS

Product line extension should also meet in with a variety needs of customers, say in a
food market where variety is important – or meet the needs of a different market segment.

BRAND LICENSING
By definition brand licensing is the renting or leasing of an intangible asset. It is also
defined as an opportunity to extend value. Companies extend their brands via licensing for
a variety of reasons. Brand licensing enables companies with brands that have high
preference to unlock their brands’ latent value and satisfy pent-up demand. Through
licensing, brand owners have the ability to enter new categories practically overnight,
gaining them immediate brand presence on store shelves and often in the media. Let’s take
a deeper look at the benefits that make licensing so attractive to brand owners.

BENEFITS OF BRAND LICENSING:

There are ten key benefits to licensing your brand.Brand Licensing enables:
1. Brand Managers to extend their brands with minimal investment. Through the licensing

arrangement, third party manufacturers are responsible for everything from product
development to inventory management to store replenishment.
2. The brand to obtain supplementary marketing support. For the right to use the brand in
their category, the manufacturer must agree to spend a percentage of their net sales on
marketing. This marketing commitment not only supports the category licensed, but can be
significant to the overall brand.
3. Trademark protection in the category. For a brand to benefit from trademark protection
in a particular category, it must be actively sold in that category. If the category lies vacant,
others may claim rights to use the mark. Extending a brand into a category via licensing
helps brand owners meet the commerce standard.
4. Increased consumer connections and insights in the categories being licensed. Extending
a brand via licensing offers thousands of incremental opportunities to connect with
consumers. By inserting a survey inside the licensed package or a toll free number on the
exterior, a brand owner can gain many additional insights about the brand.
5. A brand to gain incremental shelf space. If a brand owner chooses to extend a brand via
licensing into a new category, the brand gains tremendous additional exposure in those
categories in every retail store the product is sold. When sold into major chain retailers, the
brand can gain thousands of additional feet of brand exposure in each category.
6. Entrée into new distribution channels. By licensing the brand to a manufacturer which
currently sells into a retail channel where the brand currently does not have a presence, the
brand can gain access to that channel via the licensing relationship.
7. The brand to enter new regions. Similar to new channel access, a brand can gain entrée
into new regions via a manufacturer which has a presence in regions where the brand is
currently not sold.
8. Access to patented technology. Many companies which choose to license brands offer
proprietary innovation to the brand owner. When the patented technology reinforces the
brand’s position, the new product offered can be met with tremendous consumer
appreciation and pent up demand.
9. Knowledge transfer from the manufacturing partners who license the brand. A licensing
arrangement provides the opportunity for the brand owner and the manufacturer to share
insights and knowledge across multiple disciplines including product development,
marketing, R&D and sales.
10. The brand owner to capture royalty revenue through the manufacturer’s sales of
licensed product. This symbiotic relationship helps to create new products for the
marketplace that consumers crave. For every dollar in revenue generated by the
manufacturer, the brand owner receives a percentage in royalty payments, most of which
go straight to the bottom line.

FRANCHISING

Franchising is one of three business strategies a company may use in capturing market
share. The others are company owned units or a combination of company owned and
franchised units.
 Franchising is a business strategy for getting and keeping customers. It is a marketing
system for creating an image in the minds of current and future customers about how the
company's products and services can help them. It is a method for distributing products and
services that satisfy customer needs.

Franchising is a network of interdependent business relationships that allows a number of

people to share:

• A brand identification

• A successful method of doing business

• A proven marketing and distribution system

In short, franchising is a strategic alliance between groups of people who have specific
relationships and responsibilities with a common goal to dominate markets, i.e., to get and
keep more customers than their competitors.

There are many misconceptions about franchising, but probably the most widely held is
that you as a franchisee are "buying a franchise." In reality you are investing your assets in
a system to utilize the brand name, operating system and ongoing support. You and
everyone in the system are licensed to use the brand name and operating system.

The business relationship is a joint commitment by all franchisees to get and keep
customers. Legally you are bound to get and keep them using the prescribed marketing and
operating systems of the franchisor.

To be successful in franchising you must understand the business and legal ramifications
of your relationship with the franchisor and all the franchisees. Your focus must be on
working with other franchisees and company managers to market the brand, and fully use
the operating system to get and keep customers.

ADVANTAGES OF FRANCHISING
 The primary advantages for most companies entering the realm of franchising are capital,
speed of growth, motivated management, and risk reduction -- but there are many others
as well.

1. CAPITAL

The most common barrier to expansion faced by today’s small businesses is lack of access
to capital. Even before the credit-tightening of 2008-2009 and the “new normal” that
ensued, entrepreneurs often found that their growth goals outstripped their ability to fund
them.

Franchising, as an alternative form of capital acquisition, offers some advantages. The

primary reason most entrepreneurs turn to franchising is that it allows them to expand
without the risk of debt or the cost of equity.
First, since the franchisee provides all the capital required to open and operate a unit, it
allows companies to grow using the resources of others. By using other people’s money,
the franchisor can grow largely unfettered by debt.

Moreover, since the franchisee -- not the franchisor -- signs the lease and commits to
various contracts, franchising allows for expansion with virtually no contingent liability,
thus greatly reducing the risk to the franchisor. This means that as a franchisor, not only do
you need far less capital with which to expand, but your risk is largely limited to the capital
you invest in developing your franchise company -- an amount that is often less than the
cost of opening one additional company-owned location.

2. MOTIVATED MANAGEMENT

Another stumbling block facing many entrepreneurs wanting to expand is finding and
retaining good unit managers. All too often, a business owner spends months looking for
and training a new manager, only to see them leave or, worse yet, get hired away by a
competitor. And hired managers are only employees who may or may not have a genuine
commitment to their jobs, which makes supervising their work from a distance a challenge.

But franchising allows the business owner to overcome these problems by substituting an
owner for the manager. No one is more motivated than someone who is materially invested
in the success of the operation. Your franchisee will be an owner -- often with his life’s
savings invested in the business. And his compensation will come largely in the form of
profits.

The combination of these factors will have several positive effects on unit level performance.

Long-term commitment. Since the franchisee is invested, she will find it difficult to walk
away from her business.

Better-quality management. As a long-term “manager,” your franchisee will continue to

learn about the business and is more likely to gain institutional knowledge of your
business that will make him a better operator as he spends years, maybe decades, of his life
in the business.

Improved operational quality. While there are no specific studies that measure this
variable, franchise operators typically take the pride of ownership very seriously. They will
keep their locations cleaner and train their employees better because they own, not just
manage, the business.

Innovation. Because they have a stake in the success of their business, franchisees are
always looking for opportunities to improve their business -- a trait most managers don't
share.

Franchisees typically out-manage managers. Franchisees will also keep a sharper eye
on the expense side of the equation -- on labor costs, theft (by both employees and
customers) and any other line item expenses that can be reduced.
Franchisees typically outperform managers. Over the years, both studies and anecdotal
information have confirmed that franchisees will outperform managers when it comes to
revenue generation. Based on our experience, this performance improvement can be
significant -- often in the range of 10 to 30 percent.

3. SPEED OF GROWTH

Every entrepreneur I've ever met who's developed something truly innovative has the same
recurring nightmare: that someone else will beat them to the market with their own concept.
And often these fears are based on reality.

The problem is that opening a single unit takes time. For some entrepreneurs, franchising
may be the only way to ensure that they capture a market leadership position before
competitors encroach on their space, because the franchisee performs most of these tasks.
Franchising not only allows the franchisor financial leverage, but also allows it to leverage
human resources as well. Franchising allows companies to compete with much larger
businesses so they can saturate markets before these companies can respond.

4. STAFFING LEVERAGE

Franchising allows franchisors to function effectively with a much leaner organization.

Since franchisees will assume many of the responsibilities otherwise shouldered by the
corporate home office, franchisors can leverage these efforts to reduce overall staffing.

5. EASE OF SUPERVISION

From a managerial point of view, franchising provides other advantages as well. For one,
the franchisor is not responsible for the day-to-day management of the individual franchise
units. At a micro level, this means that if a shift leader or crew member calls in sick in the
middle of the night, they're calling your franchisee -- not you -- to let them know. And it's
the franchisee’s responsibility to find a replacement or cover their shift. And if they choose
to pay salaries that aren't in line with the marketplace, employ their friends and relatives,
or spend money on unnecessary or frivolous purchases, it won't impact you or your
financial returns. By eliminating these responsibilities, franchising allows you to direct
your efforts toward improving the big picture.

6. INCREASED PROFITABILITY

The staffing leverage and ease of supervision mentioned above allows franchise
organizations to run in a highly profitable manner. Since franchisors can depend on their
franchisees to undertake site selection, lease negotiation, local marketing, hiring, training,
accounting, payroll, and other human resources functions (just to name a few), the
franchisor’s organization is typically much leaner (and often leverages off the organization
that's already in place to support company operations). So the net result is that a franchise
organization can be more profitable.

7. IMPROVED VALUATIONS
The combination of faster growth, increased profitability, and increased organizational
leverage helps account for the fact that franchisors are often valued at a higher multiple
than other businesses. So when it comes time to sell your business, the fact that you're a
successful franchisor that has established a scalable growth model could certainly be an
advantage.

When the iFranchise Group compared the valuation of the S&P 500 vs. the franchisors
tracked in Franchise Times magazine in 2012, the average price/earnings ratio of franchise
companies was 26.5, while the average P/E ratio of the S&P 500 was 16.7. This represents
a staggering 59 percent premium to the S&P. Moreover, more than two-thirds of the
franchisors surveyed beat the S&P ratio.

8. PENETRATION OF SECONDARY AND TERTIARY MARKETS

The ability of franchisees to improve unit-level financial performance has some weighty
implications. A typical franchisee will not only be able to generate higher revenues than a
manager in a similar location but will also keep a closer eye on expenses. Moreover, since
the franchisee will likely have a different cost structure than you do as a franchisor (she
may pay lower salaries, may not provide the same benefits packages, etc.), she can often
operate a unit more profitably even after accounting for the royalties she must pay you.

9. REDUCED RISK

By its very nature, franchising also reduces risk for the franchisor. Unless you choose to
structure it differently (and few do), the franchisee has all the responsibility for the
investment in the franchise operation, paying for any build-out, purchasing any inventory,
hiring any employees, and taking responsibility for any working capital needed to establish
the business.

The franchisee is also the one who executes leases for equipment, autos, and the physical
location, and has the liability for what happens within the unit itself, so you're largely out
from under any liability for employee litigation (e.g., sexual harassment, age
discrimination, EEOC), consumer litigation (the hot coffee spilled in your customer’s lap),
or accidents that occur in your franchise (slip-and-fall, employer’s comp, etc.).

GLOBAL FRANCHISING

Franchising is a pooling of resources and capabilities to accomplish a strategic marketing,

distribution and sales goal for a company. It typically involves a franchisor who grants to
an individual or company (the franchisee), the right to run a business selling a product or
service under the franchisor's successful business model and identified by the franchisor's
trademark or brand.

The franchisor charges an initial up-front fee to the franchisee, payable upon the signing
of the franchise agreement. Other fees such as marketing, advertising or royalties, may be
applicable and largely based on how the contract is negotiated and set up.
Advertising, training and other support services are made available by the franchisor.

The Advantages & Disadvantages of International Franchises

When your franchise is successful, the thought of expansion is common, as it can lead to
new financial opportunities for you as a business owner. Expanding internationally can
sometimes be a profitable venture, while many businesses have flopped when they took that
approach. Before expanding your franchise internationally, weigh some of the pros and
cons involved.

NEW MARKETS

When you expand the franchise internationally, you can sometimes take advantage of new
markets that are unfamiliar with your business model. For example, if you own a sandwich
restaurant, you might open the first sandwich restaurant of its kind in a developing market.
When you own the first business of its kind in an international market, you may be able to
bring in substantial profits. When a new business comes into a region and the people like
it, it creates a cash cow for the owner.
FAVORABLE REGULATIONS

Depending on where you decide to expand, you may be able to take advantage of favorable
government regulations. In many countries, you do not have to submit to the same types of
regulations that are required in the United States. You may also be able to save money on
taxes and the fees it takes to get started. If you pay lower taxes in that country, it can help
improve the bottom line for your business.

CULTURAL DIFFERENCES

One of the potential problems of expanding into other countries is overcoming the cultural
barriers. Just because something is popular in the United States does not necessarily mean
that it will be popular in other countries. Every country has its own culture, and you may
not be able to accurately predict what people in that culture will enjoy. Before getting
involved in another country, it makes sense to do some market research so that you can
minimize this risk.

FINANCIAL RISK

When expanding into another country, you have to take into consideration the financial
risks that you are taking on as a business owner. For example, the exchange rates between
currencies could lead to an unfavorable return on your investment. You may also have a
hard time getting access to the supplies and products you need in any
other country. Some countries charge tariffs and fees to ship products in, which could
make your business less profitable.