Does my company really need a strong brand?
Your company may not need a brand.
That is a statement that you probably never thought you would hear out of a blog that espouses the virtues of a strong brand that connects with customers. But it is true, there are companies out there that would see no return on investing in their brand. This is determined by your company’s product, and the market for that product. So we need to understand different types of markets.
There are four types of markets. It is important to recognize that these markets are more points on a spectrum than perfect buckets. They blur into each other.
Market #1: Perfect Competition
– identical (or nearly identical) products
– low barriers of entry
– market set price
Invest in brand: No!
A perfectly competitive market is for products like fruit and vegetables. Farmers might do a lot of things to make their cucumber better than other cucumbers, but any benefit other than price is too hard to communicate. Economists love this market because it drives down prices to a theoretical low, just above the cost of production. Marketers hate this market because they have no place in it; there is no differentiation and thus nothing to sell on.
If you are competing in a market like this, you do not need to invest in your brand. You may need a logo for official documents and distribution purposes, but the difference between a mediocre logo and a great logo is not going to increase your bottom line. Just do what you need to. Your brand is really your personal reputation with your buyers based on cost and consistently delivering the goods.
Market #2: Monopolistic Competition
– few companies in the market with similar offerings
– low barriers to entry
– price set by market based on product / brand quality
Invest in brand: Yes!
This is a market where companies compete with similar products, but are differentiated enough for customers to make opinions on quality. Customers opinions on quality? That sounds like our definition of a brand. Restaurants, particularly fast food, are a great example of this. McDonald’s and Burger King both sell burgers, but their products and brands are different enough that they can have different prices. But those prices are within the bounds of the competitive market and reflective of the product quality in the minds of the customers. McDonald’s may have burgers that people prefer, but if they increase prices by $2 – $3, then people would just go to Burger King. If Mcdonald’s, Burger King and all other big burger joint brands increased their prices, then new competitors would enter their market, or customers would go to an adjacent market, like Subway sandwiches.
This market is where branding can literally pay for itself. You may have noticed that the price is set by the customer’s opinions of the product quality, and good branding can improve that opinion and thus increase the price. Why is there a difference in price between store brand soup and Campbell’s soup? Brand and brand alone. There may be some cost in there from superior ingredients and processes, but that value would be meaningless if customers did not trust the Campbell’s to fulfill their promises of superior quality.
If you say “Joe Bob’s Superior Soup” a dollar more over the store brand, almost no one would buy; we wouldn’t trust it enough to pay a premium. This is why a lot of branded products launch with discounts; they cannot charge a premium for brand because their brand has no value because there is no relationship with the customer… yet.
Market #3: Oligopoly
– few competitors in the market with similar offerings
– high barriers to entry
– prices set by price leader
Invest in brand: Yes!
This is a market where there are a few players, and the obstacles to entering the market keep any more from entering. The barriers of entry include research and development costs, regulation, distribution but especially brand. The prices of the products are usually fixed: typically by the market leader. Companies are motivated to not drop their price because if one player lowers the price, then all the companies will have to lower their prices. It is illegal for players to discuss prices because of anti-trust laws; if they did discuss it, they would be considered a cartel. Investment in brand pays off, but with increases revenue by increasing volume rather than price.
Some of our favourite products come from oligopoly markets: laptops, airlines, cars. We can all name a favourite brand in each of those industries, and we are more inclined to go to that brand when we are in need, even if the price is the same.
But you may ask: the prices of cars and laptops vary wildly! Yes, because there are product offerings with different feature sets ranging from entry level to premium. But the competitive products with similar features will have near identical prices. The Toyota Corolla and Honda Civic will always be similarly priced.
Market #4: Monopoly
– one company in the market
– high barriers or entry
– company set price
Invest in brand: No!
A pure monopoly is a good or service with one seller, and no close substitutes. There is no need to differentiate from your competition because there is none, and thus, no need for a brand.
That being said, I see a lot of companies that I consider near-monopolies buying naming rights to sports stadiums, sponsoring big events, and even advertising on TV during Sunday morning political shows. Why would they do this?
Monopolies build brands because some of them rely on public good will to maintain their perfect barriers to entry. If some government intervention gives them their monopoly (crony capitalism), or they fear regulation and anti-trust investigation. If people start getting upset, and lean on their representatives (assuming it is a democracy) than they can have their monopoly distributed.
Another reason is to seek investment. The only way a monopoly can increase or decrease the size of their market is to lower their cost of capital. This is due to some pretty complicated economic theory I would urge you to take a university course on if you are interested. But if the cost of capital decreases (ie. 4% interest to 3%) than the monopoly can make more product and access more customers. For example, let’s say someone had a monopoly over the diamond mining business; with lower cost of capital they can extract diamonds from the deeper mines that cost more per karat mined. Lower cost of capital could also mean they can drop their prices a little, and access new customers previously priced out. A brand helps monopolies acquire investors.
So in conclusion, your company may not need a brand. But the fact that you are asking that question means you are likely starting a business. By virtue that you can do that means barriers to entry are low enough, so your market is somewhere between perfectly competitive and monopolistically competitive.
If your market is completely competitive and it is impossible for you to differentiate your product from another, than you do not need a good brand. Have a simple logo designed, print it on your crates and be done with it. But I ask you, why are you entering that market?
If you see an opportunity to serve people not previously served at a certain price point or new offering, than of course you need a brand. Please read our other articles to find out how to build that brand.